There are two types of life insurance in the Philippines: Term life insurance and permanent life insurance. Permanent life insurance may either be whole life or endowment life insurance. A third type may, perhaps, be added in the form of variable unit-linked life insurance (VUL), which some quarters classify as a form of whole life insurance.
Term life insurance
Term life insurance (or term insurance) only provides death benefit or the face amount for a fixed period of time, let us say, between five to 30 years. The term is chosen by the insured, i.e., 5, 10, 15, or 30 years. The term refers to how long the policy will be active. If the policyholder does not die within that period of time, meaning he outlives the term coverage, the coverage ends and the insured will not get any benefit. In most likelihood, the beneficiaries will receive no benefit because the insured will survive the insurance coverage. The insured must die within the covered term for his beneficiaries to be entitled to benefits. The policy bears no other or added value. In other words, the insurance coverage is for a specified “term” only. After the coverage ends, it can be renewed but usually at a higher premium. As the policy expires, the premiums paid are deemed spent. So while it is attractive for its simplicity and its low premium, it has a built-in expiration date.
The premium increases as the insured grows older as the morbidity and mortality risks also increases. It has also been described as a “pure” or “straightforward” life insurance. There are no hidden fees or exclusions. This is the most basic life insurance and is the cheapest life insurance in the market because it has no savings component. There is no cash value and no dividends. No capital is being built up.
The choice between term life and whole life could be a question of affordability and purpose, perhaps taking into consideration the financial needs of the beneficiaries. In both, the death benefits are guaranteed. Most term life insurance are convertible into whole life, subject to a cut-off period. There is usually a default term conversion rider.
Whole life insurance (Permanent insurance)
Whole life insurance provides coverage for the entire lifetime (or the whole life) of the insured or until the insured is 100 years old as long as the policy is in force. Unlike in term life, there is no need to decide on the length or duration of the coverage. It does not expire. In other words, the policy matures when the insured reaches the age of 100. But since the age of 100 is much beyond the average life expectancy, it is unlikely for whole life policies to mature. In addition to a death benefit, there is a savings component, which makes it more complicated than term life. This savings/investment component, which are placed in low-risk investment, guarantees returns which are modest. Whole life, therefore, is a conservative investment option. It earns annual dividends, although it is not guaranteed, as a participating plan, which then goes to the savings component. The policyholder can draw cash or borrow from the policy for any reason. If a policy loan is taken out, it does not have to be repaid but it will simply reduce the benefits. The unpaid amount will just be deducted from the face value of the policy. Compared to term life insurance, whole life is more expensive. It is estimated that whole life is six to 10 times more expensive than term life. The premium is fixed even as the insured grows older. Unlike in term life where the premium increases as the mortality risk increases. This need for higher premiums has been offset by the high premiums collected in the early years of the policy.
A part of the premiums, though, goes to build up or accumulate what is known as the “cash value” (meaning the face value plus the dividends) or the savings/investment part as the so-called living benefits. This cash value is, perhaps, the central feature of whole life. This cash value typically takes some time, i.e., at least 10 years, to build up. This living benefit can be used for any purpose and can be exhausted to the point that the policy terminates.
A whole life usually requires a medical examination, although such can be waived but at a higher premium.
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Dennis B. Funa is the current insurance commissioner. Funa was appointed by President Duterte as the new insurance commissioner in December 2016. E-mail: dennisfuna@yahoo.com.
