Tips on Life Insurance
Life insurance helps bring about peace of mind.
FINANCIAL freedom can be broken down into three steps.
The first step is saving and this step is about building wealth. The second step is insuring and this is about protecting wealth. The third step is investing and this is about growing wealth.
Since the future is filled with risk and uncertainty, life insurance can be a good tool in hedging. Key questions have to be addressed to gain a better appreciation of the matter.
Why should one get life insurance?
If one is able to save but unfortunately encounters an adverse event like death or sickness in the future, the costs that will occur may possibly wipe out a big chunk of savings that can affect both the individual and the family. Not having life insurance could also potentially lead to huge opportunity costs in terms of not being in a capacity to pursue good investment opportunities.
Life insurance helps bring about peace of mind. It has death benefits. If one dies, the loved ones get something. In the case of breadwinners, life insurance helps ensure that families are able to go on with their lives through the financial coverage indicated in the life insurance policy. Many goals set are comprised of family goals so life insurance helps the family continue in their quest to achieve goals.
Life insurance also has living benefits. If one gets disability or critical illness, a life insurance policy with the relevant riders can provide for the money needed to cover for the costs related to these unfortunate developments. It can also provide income replacement to a certain extent.
Meanwhile, if one reaches the age of retirement and lives beyond that, life insurance can also ensure life goes on during those years.
When should one get life insurance? In personal finance, time is a great ally. The best time to get life insurance is when we are young. Premiums are cheaper when policies are obtained in our younger years. Insuring early helps jump-start as well the right mindset on finances. Life insurance is also ideally obtained when we are in the prime of health. Having a healthy lifestyle goes a long way in getting good insurance.
What type of life insurance should one get? In any successful personal finance journey, having a clear goal determines the corresponding strategies and activities that follow suit. The insurance choice thus depends on the financial goal. In the Philippines, two of the popular life insurance options are term insurance and variable unit-linked life insurance or simply VUL. Heated debates often occur among financial literacy stakeholders regarding the right life insurance one must get. Both have advantages and disadvantages.
Term insurance provides benefit when one dies. This is an advantage but many argue that it is also a disadvantage because of the limited condition in obtaining the benefit. Term insurance is relatively cheaper in terms of premiums paid. The lower premiums can thus allow one to use the savings to pursue investment opportunities. The lack of time and the lack of skill may be obstacles though in investing.
VUL can provide benefit when one dies, gets sick or lives too long given its host of death and living benefits. The investment component and critical illness riders are examples of the living benefits. However, VUL is relatively more expensive than term insurance with respect to both premiums and charges. In choosing the VUL provider, one must conduct due diligence on aspects like brand heritage and financial strength.
Not all roads are smooth and easy. Humps will most likely be encountered along the way. Having life insurance is like having a spare tire. We purchase the spare tire before we hit the humps to ensure that we are effectively and efficiently prepared. It will be there when we need it the most. Having the right type of life insurance thus helps keep us on track as we journey toward achieving financial freedom.
Genesis Kelly S. Lontoc is a registered financial planner of RFP Philippines.
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