Misconceptions About Life Insurance

Life insurance is an important aspect of personal finance. Despite this, less than 10% of Filipinos are insured. I would say part of reason why Filipinos are not aware how important insurance is or why they don’t take action is because the don’t fully understand how life insurance works and how it can be beneficial to them. Here are some misconceptions about life insurance that at times prevent an individual from getting his own insurance.

It is expensive. Expensive may be relative so I’d let you be the judge if these options for life insurance products are indeed expensive in your views. Term insurance is the cheapest form of insurance and to illustrate how low can premiums be: a P500,000 coverage for a 30-year old can only cost P3,000-P4,000 a year. This is just about P300/month, which is equivalent to 2 coffee drinks from your favorite coffee shop. A Variable Unit Linked product, an insurance with investment component, can cost just P1,200-P2,000 a month but since it has an investment component, one can possibly earn enough from the investment to recover all the premiums paid. Corporate or group insurance costs even less than the term insurance, with some products having a premium of less than P100 per year per person in a group.

It only has death benefits and no living benefits. A traditional life insurance has cash values which can be loaned or redeemed in full once surrendered. Endowment plans also allow one to receive guaranteed cash amount regularly after maturity while VUL policies have investment component which can give non-guaranteed returns between 3%-15% on the average annually. Though life insurance’s main purpose still remains to be for the benefit of those who were left behind by the insured, it still has features that would allow the insured to enjoy benefits while still alive.

Coverage is limited to the insured’s death. A lot of people think that life insurance companies only covers a person’s death, meaning benefits can only be paid out after the insured dies. But there are products that can assist financially in case of accidental dismemberment or disability and even critical illnesses. For instance, upon diagnosis of cancer, a critical illness insurance can give a first diagnosis lumpsum payment to help with treatment and medications. The amount may not be fully enough to compensate all medical expenses, but it eases the burden of shouldering cost out of our own pockets and eventually making us financially handicapped. For both accident and critical illness benefits, you can attach them as riders to your plans or get yearly renewable stand-alone insurances.

If I cannot pay premiums, I have no option but to let the policy lapse. First off, one has 30 days from the due date to pay the premiums. Secondly, assuming the policy owner was unable to pay the premiums within the grace period and the policy indeed lapses, he can still reinstate the policy as long as he pays all unpaid premiums and possibly interests that goes with it. Lastly, if the owner wants to stop paying premiums but would like to still be insured, he can choose the reduced paid up option which would allow him to completely stop paying succeeding premiums but still be covered, this time for a smaller face amount. For VUL policies, the owner can choose to go on premium holiday for a year or two (or even longer) as long as he makes sure that he has enough investments or account values that can pay for the premium charges if any and the cost of insurance.

HMO health insurance and life insurance is one and the same. I’ve asked a number of people if they have life insurance and many would answer yes because the company provides for them. But if I asked how much they are covered for, they tell me that checkups are free and there’s additional benefits for hospitalization. These are benefits of an HMO insurance and not of a life insurance. Both are really good products but serve different purposes. Though there are life insurance products that can cover for hospitalization, they don’t cover checkups or annual physical examinations which are provided by HMOs.

*Published in Business Mirror – July, 2014

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