Choosing The Right Life Insurance by Randell Tiongson

A friend suddenly approached you offering an insurance product. He/she said you certainly need one. You’re then confused, do you really need one? And if ever, with so many types of  insurance in the market, how do you know if the one’s being offered by your friend is the one perfect for your need.

Let’s take a look at what Randell Tiongson advised a follower who asked the same question.

Choosing the Right Life Insurance for You
By Randell Tiongson | Philippine Daily Inquirer
11:30 pm | Tuesday, June 19th, 2012

Question: What are the criteria in choosing a good life insurance?—Jeremy Jessley Tan (@jeremyjessley) via Twitter

Answer: Let me congratulate you first for your decision to consider life insurance. Although important in personal financial planning, life insurance and other financial instruments are not really among the priorities of many Filipinos. The percentage of our insured population is so low that we are vulnerable to so much personal risks that will have devastating effects in our lives.

I’m not sure if your query relates to life insurance programs or life insurance companies so let me just try to answer both.

Before buying life insurance, it is important to determine if you need one or not. If there are people dependent on your income like your spouse, children, parents or siblings, chances are you really need one. However, if you are single and have no one who depends on your income, you probably would want to defer buying a life insurance policy until such a need arises. If you are considering buying a life insurance policy as an investment, do consider other instruments that will serve that purpose. Life insurance should be purchased because of the need to manage life’s risks, primarily against untimely death and serious physical breakdown (disability). Accumulation of life insurance fund values for investment purposes should only be a secondary reason.

It is wise to first determine the amount of life insurance you need. A professional insurance adviser should be able to do an honest-to-goodness insurance needs analysis for you or better yet, make one yourself. Here’s a simple way to determine the amount of insurance you need.

  • Divide a sheet of paper (or excel sheet if you must) into two parts vertically.
  • On the left side, put a heading and call it “Needs” and on the right call it “Sources.”
  • Under the needs section, think of the expenses that need to be paid should you experience untimely death. These may include hospitalization, burial costs, outstanding obligations and about three months’ worth of expenses (label this as miscellaneous)—get the sub-total and label it as “immediate expense.”
  • If you have any schooling children, it is best to determine their educational needs as these will be a primary concern of the people you will leave behind. A simple way to do this is to get the estimated yearly educational expenditure and multiply this by the remaining number of years until they graduate. There’s no need to compute for the future value of education as we are merely allocating an educational fund that should eventually be invested. Label the sub-total as “educational expenses.”

The third and final component of your “Needs” section involves determining the living costs of your loved ones.

  • Multiply your monthly need by 12 to get the yearly expenses as it is easier to plan on an a yearly basis.
  • Divide the annual amount by an estimated investment rate. The sum is a fund that can be invested to give perpetual interest payments to be used for living expenses.

On the right side of your sheet called “Sources,” try to think of all the possible sources of funds should need arise—such as cash, investments, real estate and life insurance proceeds. It may not be a good idea to include your home as a source of cash as your family will need to keep the home.

  • Deduct the total sources from your total needs and the balance is an amount you should consider for additional life insurance.

Note that life insurance is not your only option to narrow the gap between needs and sources but it is definitely the cheapest and fastest way to bridge the gap. Life insurance can also be a temporary solution as you build your other assets like cash, investments and real estate.Now that you know how much you need, the next thing you have to determine is what kind of life insurance you should get and from which life insurance company.

Assuming you have decided you needed a life insurance and you already have an idea how much coverage you need, the next question is what kind of life insurance should you buy and from whom should you buy it?

Generally speaking, there are two types of life insurance—term insurance and permanent insurance.

Investopedia.com defines term insurance as “a type of life insurance policy that provides coverage for a certain period of time, or a specified ‘term.’ If the insured dies during the period specified in the policy and the policy is active—or in force—death benefits will be paid.

Term insurance is initially much less expensive compared to permanent life insurance. Unlike most types of permanent insurance, term insurance has no cash value. It is the plain vanilla of life insurance; it is what we call pure insurance. Term insurance is recommended for those who want to maximize insurance protection while minimizing cost, as this type of insurance has the cheapest premium. It is interesting to note that less than 20 percent of term insurance policies are still in force when the insured dies and, therefore, never pay a claim. This product tends to be the least expensive insurance, initially. However, either the face amount decreases or the premium increases as the insured gets older. Term insurance provides death benefit protection only, has no cash value and not much versatility.

Permanent life insurance is “an umbrella term for life insurance plans that do not expire (unlike term life insurance) and combine death benefits with a savings component. The savings portion can build cash value—against which the policy owner can borrow funds, or in some instances, can be withdrawn to help meet future goals, such as paying for a child’s college education. The two main types of permanent life insurance are whole and universal life insurance policies, as per Investopedia.com. Whole life insurance is commonly referred to as ‘traditional life insurance.’ It is an insurance policy that matures at age 100 and has level paying premium, which means it does not go up unlike that for term insurance. You may opt to pay a whole life insurance until maturity or opt for shorter paying periods (at a higher premium).

Aside from death benefits, a whole life insurance policy also has cash value that can be withdrawn yearly or left to accumulate and earn interests. A whole life can also be a ‘participating’ plan, which can earn policy dividends. Policy dividends are allocated by an insurance company and dependent on the firm’s claims experience and investment returns. Most traditional life insurance plans will have a guaranteed cash value portion and a nonguaranteed portion (policy dividends).

Variable universal life or unit-linked life insurance differs from traditional universal life insurance because the underlying values can be invested, at the direction of the policy owners, in many sub-accounts—such as equity, fixed income and balanced account options. Policy owners are given the opportunity to direct their cash values based on their risk tolerance, investment objectives and personal asset allocation models. The policy owner assumes the risk in a variable policy, but has the potential for the highest return. Also, he can integrate the policy with HIS investment philosophy.Variable life insurance is typically recommended for longer-term needs, where cash accumulation, as well as death benefit protection, is a priority.

[Check Sun Maxilink Prime – Insurance with Mutual Funds for Retirement]

So which policy should you get and where should you get it from? I will answer that in Part 3 of this article due the limited space in this column. Catch it in two weeks.Allow me to leave you with these words of wisdom regarding our fiscal responsibility to our loved ones—

“But if anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever.” 1 Timothy 5:8, ESV

Deciding on a type of plan should be consistent with your objective. If the only purpose of considering life insurance is protection, then a term policy is something you should consider. Further, if you just want to maximize insurance coverage and reduce cost, then a term policy is most prudent. Just make sure that you don’t mind paying premiums that will not be recovered unless a death claim is filed.

If you would like some savings to go with your insurance coverage at the same time, you may opt to get a permanent plan instead of a term policy. Some people would want some recovery of the premiums they are paying when the time comes they feel they don’t need any coverage anymore.

A traditional plan like a whole life insurance will have cash values that will accumulate over the years, typically with a guaranteed cash value and a non guaranteed portion via dividends. Unfortunately, the returns of traditional insurance policies are very low, comparable to a time deposit rate. Accumulations in traditional plans are also on a long-term basis and will take you many years to break even.

A variable universal plan (or investment link), on the other hand, will provide better accumulation of funds as they are market-driven instruments. The downside of this product is that it does not offer any guarantees beyond death benefits. Still, it is expected to outperform traditional life insurance products over a long period of time, making it more popular nowadays.

Assess your need thoroughly—Would you want to combine your insurance coverage with savings and investment or would you want to do it separately? You can buy term and invest the difference—or you can buy a variable universal life policy that will do that for you.

If you want insurance coverage with guaranteed savings and are willing to accept low returns, then a traditional life policy is for you. If you want better returns but with volatility, then go for a variable universal life. If you just want the plain vanilla insurance, go with a term plan. There is no such thing as a ‘best’ life insurance product—it really depends on your need or affordability.

As to insurance companies, I’d recommend that you consider life insurance companies among the top 10 in the country because they are usually more stable and are highly reputable. I posted a ranking of the top life insurance companies of 2011 on my website— http://www.randelltiongson.com/2011-top-life-insurance-companies-my-musings/.

The Insurance Commission monitors the operations of all insurance companies and has strict standards, particularly on solvency. Most life insurance companies are well capitalized and it is comforting to know that no life insurance company in the Philippines has ever folded up. It might also be a good idea to ask around about experiences of others with regard to after-sales servicing and claims paying reputation of different insurers.

For me and many others, customer service is a very important criterion—especially since a life insurance coverage is long term in nature.

You may want to get proposals from three life insurance companies of the same product and look at the benefits they offer. I notice premiums of some companies are substantially higher than others so it will be a good idea to be thorough when you are reviewing. Compare benefits and riders, add on those that you need and remove those that you think are unnecessary. When you are considering a variable universal life policy, check out the management fees—some charges are much higher than others.

Finally, I urge you to also be selective in dealing with your insurance advisor. I will go with an advisor who knows his products thoroughly, can answer most of your inquiries, can conduct a good needs analysis and will put your interest first before his sale. Unfortunately, quite a few insurance advisors have issues like misrepresentation or, worse, non remittance of premiums. It is important that you deal with a professional and it is easy to spot one by observing the way he conducts his business.

Whether you buy from an insurance agent or from a bank (via bancassurance), make sure you get a policy that you need, you can afford, from a company that is reputable and from an advisor that you trust.

  • Tip: If you notice that the advisor is so much in a hurry to close a sale and is more concerned about meeting his sales quota than your welfare, you might want to look for another advisor.My prayer is that more Filipinos will be like you. More Filipinos have to be covered considering the benefits of life insurance.

(Randell Tiongson is an advocate of Life & Personal Finance. He is a director of the Registered Financial Planner Philippines. To learn more about Personal Financial Planning, join the RFP for more details, e-mail info@rfp.ph or visit www.rfp.ph.)

Garry De Castro

Garry De Castro is a personal finance advocate, Financial Advisor, Certified Investment Solicitor (Mutual Fund Representative), investor, stock market trader, blogger, and IT practitioner. He started sharing and writing financial articles 2008 just to share his financial learnings to friends, relatives and anyone who wishes to be financially independent.

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