Insurance 101

I have briefly discussed in one of my articles where one should be putting there money (click here to read about it). Second financial vehicle I have mentioned is to have a Variable Life (VL) Insurance for your long-term funds. Long-term funds are usually intended for children's education and for retirement. But before I discuss about Variable Life (VL) Insurance, let me first explain the basics of life insurance.

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

What is a Life Insurance?

• According to wikipedia, life insurance is a contract between the insurer and the policy owner whereby a benefit is paid to the designated beneficiaries if an insured event occurs which is covered by the policy.
• Life insurance is based on a mortality table – the older you get, the higher the cost of insurance. Because the older the person gets, the riskier the life.

Why get a Life Insurance?

• One gets a life insurance to replace the loss of a person earning for a family or for a future.

What does a life insurance mean to an individual?

• Life insurance is a COST because you pay for it and you get it when something happens.
• Life insurance is an INVESTMENT because it doubles or triples your money.

Types of Insurance

1. Term Insurance a.k.a. Pure Insurance – where you pay a certain amount, you are covered a certain amount. The policy does not accumulate cash value. Term is generally considered “pure” insurance, where the premium buys protection in the event of death and nothing else.
Fixed Coverage, Fixed Premium, Fixed Period/Term, Zero Return

2. Life Insurance
Insurance + Savings (cash value + dividends)
Fixed Payment, Low Return
a. Whole Life – you pay your whole life; it stops when you’re 101 years old. Note that dividends stated on a policy are not guaranteed values.
b. Endowment – after a number of years, you will receive a certain amount. Shorter terms but more expensive.

3. Universal Life Insurance – this type of insurance does not exist in the Philippines anymore.
Insurance + Savings
Variable Payment, Low Return

4. Variable Life Insurance – you decide how much is your premium
Insurance + Investment (risk is 100% on the insured as he is the investor)
Fixed Payment, Higher Return, Variable Payment Period
3 Types of Funds:
a. Equity – High Risk, High Yield; averaging from 8%-10%
b. Fixed Income – Low Risk, Low Yield; invests in government bonds etc.; averaging from 4%-6%
c. Balanced – mix of equity and fixed. The fund managers decide how many parts for equity or fixed.

Watch out for my next article mainly about Variable Life Insurance. =) Make sure to subscribe to my blog to not miss upcoming posts.

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Article Credits to Mr. Wacky Salazar, my financial adviser and mentor

References:

• Basic Facts about Life Insurance