When To Choose Term Insurance Instead Of VUL
The debate over term insurance versus variable unit-linked insurance can be interesting. At times, it can be very heated. The truth is both types of insurance products can be beneficial to the insured or the owner. It’s just a matter of knowing which type of benefits one prefers. In this first part, I will try explaining the term insurance and why it could be something you would want.
A term insurance product is the simplest form of insurance. Term insurance only has death benefits. It means the benefits are only given when the insured dies. It has no living benefits and is usually renewable yearly.
The common misconception about insurance is that it’s an “investment”. It’s not. Funny how people can’t understand the concept of insurance until told about the car insurance analogy. A term insurance pretty much works the same way as our car insurance. We don’t get any monetary benefits if our cars are unscathed during an accident. The benefit is only “enjoyed” when the car suffers major damage in a mishap. The bigger the damage, the bigger the benefit. The same goes with term insurance. There are no monetary benefits while we are alive. The only time our beneficiaries would “enjoy” the benefits of term insurance is when we die.
What are the advantages of term insurance?
Cost. The biggest advantage of term insurance is that it’s affordable. As a point of reference, I at 38 years old can get P1.5 million coverage yearly-renewable term insurance for around P6,000 annual premium. In comparison, for the same coverage, a regular-pay (pay until age 100) VUL will cost around P18,000 annual premium. Premium for a 10-year pay VUL will be around P79,000 per year.
Charges. Another advantage of a term insurance is that there are very little to zero charges. Since you only pay for insurance coverage, there are no premium, administrative, and top-up charges.
Convertible. Unlike the VUL where you can get coverage up to age 100, term insurance is renewable only until age 85. However, should you want to get coverage beyond age 85, you can convert your term insurance into a traditional life insurance plan.
When to choose a term insurance instead of VUL? The most obvious reason to get a term insurance is when one is a breadwinner and would need income protection but he has limited budget. It’s affordable enough for anyone.
A term insurance would also make sense if you need temporary additional protection. For example, in education planning, one important factor is insurance coverage to ensure that if the insured dies, the child could continue schooling. Usually, education protection is needed for just 20-25 years depending on the number of children. So instead of getting insurance until age 100, one can just get term insurance that will give him coverage for the next 20-25 years.
In the next column, I will discuss the VUL product. Again, both insurance products have their pros and cons. It’s just a matter of selecting which one fits your needs best.
Jeremy Jessley Tan is a registered financial planner of RFP Philippines. To learn more about personal financial planning, attend the 69th RFP program this July 2018. To inquire, email email@example.com or text <name><e-mail><RFP> to 0917-9689774
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