Life Insurance Explained: What It Is and How It Works

Imagine this: Pedro, a 35-year-old father of two, works hard every day to provide for his family. His kids are in school, and his wife takes care of the household. Life seems to be going smoothly, until one day, Pedro is diagnosed with lung cancer and is unable to work for several months. With no income coming in, his family struggles to pay the bills, buy groceries, and keep their children in school.

Now, imagine if Pedro had life insurance. He and his family would have received financial support to cover his medical bills, pay for daily expenses, and even keep the kids’ tuition going. Life insurance could have made all the difference in keeping his family financially secure during this difficult time.

This story could be any one of us. In the Philippines, where unexpected events like accidents, illnesses, or sudden loss of life happen every day, life insurance is one of the best ways to ensure our loved ones are protected when life takes an unexpected turn.

So, what exactly is life insurance, and why should every Filipino consider it? Let’s break it down in a way that’s easy to understand.

What is Life Insurance and How Does It Work?

In simple terms, life insurance is an agreement between you and an insurance company. You pay regular amounts (called premiums), and in return, the company promises to provide financial support to your beneficiaries when you pass away. This support, known as the death benefit, can be used to cover essential needs like daily expenses, medical bills, and even education for your children.

But life insurance isn’t just about securing your family after you’re gone; it offers much more than that. Today’s life insurance policies are designed to provide benefits while you’re still alive. These are commonly referred to as living benefits and riders (or supplementary benefits). Here are the primary purposes of a life insurance policy:

• Death Benefit: The main feature of life insurance. Your nominated beneficiaries receive a lump sum (the death benefit) when you pass away, which they can use to cover daily expenses, debts, medical bills, and education.
• Critical Illness Coverage: Many life insurance policies now cover serious illnesses like cancer, stroke, or heart disease. This means your policy can help pay for expensive treatments and massive hospital bills, easing the financial burden on your family.
• Savings Plan: Certain policies allow you to accumulate cash value over time. You can use this for future expenses, such as your children’s education or your retirement fund. These are usually traditional life insurance plans, particularly endowment plans.
• Investment Component: Some life insurance products, like Variable Universal Life (VUL), let you invest part of your premium. This gives you the opportunity to grow your money while staying protected, helping you achieve long-term financial goals.
• Estate Tax Coverage: Life insurance can help cover estate taxes when transferring wealth or property, so your heirs won’t have to worry about where to get funds for tax payments.
• Mortgage Redemption Insurance (MRI): It can also help pay off your mortgage in case of death, ensuring your family won’t lose their home.
• Business Protection: Life insurance can safeguard your business by ensuring continuity in case of the owner’s or a key person’s death. Business owners can also use it as collateral for loans or to fund buy-sell agreements.

Life insurance isn’t just about death. It’s about protecting your present and preparing for your future, ensuring that whatever happens, you and your loved ones are taken care of. It’s a versatile financial tool that secures both your present and future.

Pedro’s Case
Using Pedro as an example: if he had a life insurance policy with critical illness coverage worth ₱1 million, his family would have received that amount upon his diagnosis of lung cancer. This money would help them continue their lives without worrying about where to find funds for daily needs or medical bills resulting from Pedro’s diagnosis.

Additionally, in case of Pedro’s demise due to his critical illness, his family would also receive the lump sum death benefit from his life insurance policy on top of the critical illness coverage. Let’s say the death benefit is ₱2 million; his family will receive this amount after he is gone.

That’s the beauty of life insurance—it protects you and your family both while you’re living and after you’re gone.

The State of Life Insurance in the Philippines

Life insurance is regulated by the Philippine government through the Department of Finance (DOF) under the Insurance Commission (IC). This regulatory body ensures that life insurance companies operate fairly and maintain the financial capacity to honor their commitments to policyholders. The Insurance Commission also oversees the creation of policies and rates, ensuring transparency and consumer protection.

Here in the Philippines, many people still underestimate the importance of life insurance. According to the Insurance Commission’s most recent financial report, insurance penetration among Filipinos remains below 2%, meaning that the vast majority of families are at risk of facing financial difficulties if something unexpected happens.

A common misconception is that life insurance is only for the wealthy or that it’s too expensive. However, that’s far from the truth. Life insurance is for everyone—whether you’re a small business owner, an OFW, or an office worker.

Why Do Filipinos Need Life Insurance Today?

There are many reasons why life insurance is more important now than ever. Let’s look at some of the issues we face in our country:

1. Health Risks: According to the Philippine Statistics Authority (PSA), many Filipinos die from diseases like heart disease, diabetes, and stroke. These illnesses don’t just affect our health—they also drain our finances. Without life insurance, families can be left with large medical bills that are difficult to pay. The PSA’s recent report on the national health account mentioned that almost half of medical spending in the country comes from out-of-pocket expenses for Filipino individuals and families. This alarming insurance gap needs to be addressed through adequate coverage.
2. Financial Struggles: A recent survey by the Bangko Sentral ng Pilipinas (BSP) found that only 31% of Filipino households have savings. Most families live paycheck to paycheck, and if the breadwinner dies, it becomes very difficult for the family to continue without any financial support. If the breadwinner has a life insurance policy, the death benefit can help ensure that their loved ones can maintain their standard of living and reduce financial challenges.
3. Rising Costs: Inflation is making everything more expensive—food, transportation, hospitalization, and education. Having life insurance means your family will have a financial safety net to cover these rising costs if something happens to you.

The Benefits of Life Insurance

Here are some key reasons why life insurance is worth considering:

1. Peace of Mind for Your Family: Life insurance ensures that your family and loved ones will have the financial support they need, even if you’re no longer around. This provides one less thing for them to worry about during an already difficult time.
2. Income Replacement: If you’re the breadwinner of the family, your life insurance can replace your income. This way, your family can continue paying bills, buying groceries, and funding your children’s education without financial strain. It’s an act of love and a strong, lasting legacy that shows your presence, even if you’re already gone.
3. Investment Opportunities: Some life insurance plans allow you to invest your premiums. For example, investment-linked insurance plans let your money grow while also providing life coverage, giving you both protection and investment potential.
4. Health Coverage: Many life insurance policies also cover critical illnesses, which can significantly help with hospital expenses and treatments. Additionally, life and health insurance policies can now be obtained together in one package, making it hassle-free.

READ: Sun Fit and Well – A Comprehensive Health Insurance

Types of Life Insurance You Can Get in the Philippines

There are different types of life insurance available to suit your needs. Here are the most common types in the Philippines:

1. Term Life Insurance: This is the most affordable option, providing coverage for a specific period (like 5, 10, or 20 years). If you pass away within that period, your family will receive the death benefit. It’s a good choice if you’re looking for temporary but reliable coverage, as term life insurance plans are the cheapest.
2. Whole Life Insurance: This type provides coverage for your entire life, as long as you continue paying premiums during a specified period. While it is more expensive than term life insurance, it guarantees a payout to your family regardless of your age at the time of passing. Additionally, whole life insurance plans typically include living benefits and cash values that you can access during your lifetime.
3. Health Insurance: Considered a type of life insurance, health insurance covers medical expenses, including hospitalization and critical illness treatments. Many health insurance plans offer lump-sum payouts upon diagnosis of a critical illness or hospitalization. This can be a significant financial relief, helping cover massive medical bills and other expenses during a difficult time. Health insurance can also be added as a rider to life insurance policies, enhancing your coverage by incorporating health benefits. Such payouts can ensure that you and your family maintain financial stability while focusing on recovery.
4. Variable Universal Life (VUL) Insurance: This type of insurance combines life insurance with investment. A portion of your premium is allocated to an investment fund, allowing your money to grow over time. You’ll have the opportunity to invest in various mutual funds across different financial markets, such as stocks and bonds. VUL insurance plans are an excellent option for those seeking both protection and wealth-building.
5. Endowment Plans: These plans provide coverage for a specific term, offering fixed lump sum returns either during the term, at the end of the term, or upon the insured’s death. Endowment plans are ideal for individuals seeking to accumulate guaranteed savings while ensuring they have life insurance protection.

READ: Sun Smarter Life Elite – Guaranteed Money For Life

How to Choose the Right Life Insurance for You

Here’s a simple guide to help you choose the right plan:

1. Determine Your Goals: Ask yourself, why do you want life insurance? Is it to protect your family’s future, cover health risks, or build savings? Knowing your goals will help you pick the right type of insurance.
2. Set Your Budget: Decide how much you can afford to pay for your premiums. Life insurance is a long-term commitment, so make sure it fits into your budget.
3. Consider Your Age and Health: The younger and healthier you are, the lower your premiums will be. It’s a good idea to get life insurance while you’re still in good health to lock in better rates.
4. Evaluate Different Types of Plans: Familiarize yourself with the various types of life insurance available (as briefly mentioned above). Each type has its unique benefits and limitations. Understanding these differences will help you make an informed decision that aligns with your financial goals.
5. Review the Policy Features: Look for additional features or riders that can enhance your policy, such as critical illness coverage, accidental death benefits, or premium waivers. These features can provide extra protection and flexibility based on your needs.
6. Research the Insurance Company: Choose a reputable life insurance company with strong financial standing, positive customer reviews regarding claims, and a trustworthy history. It’s advisable to select from the top 10 life insurance companies in the Philippines to ensure reliability.
7. Talk to a Financial Advisor: Consulting with a licensed advisor (like me!) can help you find the best plan that suits your needs and budget. They can offer valuable insights into the best options available based on your financial situation and future goals.
8. Reassess Your Coverage Regularly: Life circumstances change—such as getting married, having children, or changing jobs. Regularly review your life insurance coverage to ensure it still meets your needs. Adjust your policy as necessary to keep it relevant to your current situation.

Sample Computations: How Much Will It Cost?

Let’s go back to Pedro, our 35-year-old father of two. If he chooses a minimum 10-year paying Variable Universal Life (VUL) insurance plan with ₱2 million in coverage, his annual premium at this age might range from ₱50,000 to ₱80,000, depending on the policy’s overall coverage and benefits. This plan also includes investment fund benefits, which are invested in a fund option selected by Pedro, allowing him and his family to withdraw funds anytime in the future for various purposes.

If Pedro opts for a term life insurance policy, he might only need to pay ₱15,000 to ₱30,000 annually, which is significantly cheaper but comes with more limited coverage and benefits. Term life insurance provides protection for a specified period—meaning that if Pedro passes away during this term, his beneficiaries receive the death benefit. However, once the term expires, there is no payout or cash value, and he will need to consider renewing the policy or exploring other options.

On the other hand, a 10-year fixed-paying whole life insurance policy may cost between ₱90,000 and ₱150,000 for someone of Pedro’s age. This type of policy offers guaranteed coverage for the insured’s entire life, as long as the premiums are paid during the specified period. Whole life insurance also accumulates cash value over time, which can be borrowed against or withdrawn if needed. Additionally, it often pays dividends, providing policyholders with an opportunity to increase their benefits. Some whole life insurance plans also come as endowment plans, which pay the policyholder a fixed amount at a guaranteed period. Whole life insurance can serve as a long-term financial strategy, offering stability and wealth accumulation.

Sample Computations
Insured: Pedro, age 35, male, non-smoker
Death Benefit: ₱2 million
Critical Illness Benefit: ₱1 million
Annual Premium Range:
– VUL: ₱50,000 to ₱80,000
– Term Life: ₱15,000 to ₱30,000
– Whole Life: ₱90,000 to ₱150,000

These numbers are just estimates presented in the case of Pedro. Your actual premiums will depend on various factors, as briefly outlined below.

Factors Affecting Life Insurance Premium Computation

When insurance providers calculate premiums, several factors come into play. These determine how much you’ll pay for your coverage and can vary depending on your specific situation. Here are the most common factors:

1. Age: Younger individuals typically pay lower premiums since they are considered to be at a lower risk of health complications or death.
2. Health Status: Your current health condition, medical history, and lifestyle habits (e.g., smoking, drinking, or physical activity) greatly influence your premium. Healthier individuals enjoy lower premiums.
3. Occupation: Some jobs are riskier than others. High-risk occupations like construction workers or pilots tend to have higher premiums due to the increased likelihood of accidents or harm.
4. Coverage Amount: The higher the death benefit or coverage you choose, the more you will pay in premiums. A larger payout for your beneficiaries requires a higher premium.
5. Policy Type: The type of insurance—whether it’s term, whole life, VUL, or others—also affects the premium as mentioned in the previous section. Term life is generally the cheapest, while whole life and VUL policies are more expensive due to the additional features like guaranteed cash values or investment components.
6. Gender: Statistically, women tend to live longer than men, so premiums for women are often lower than those for men.
7. Lifestyle: Risky activities, such as extreme sports, may lead to higher premiums. Similarly, people with safer hobbies and a healthier lifestyle usually get lower rates.
8. Add-ons and Riders: If you choose to enhance your policy with riders (e.g., hospitalization benefit, critical illness benefit, accidental death benefit, disability benefit), these extra benefits will increase your overall premium.

Sun Life: Your Trusted Insurance Partner

As a financial advisor with Sun Life, I’m proud to represent a company with over 129 years of history and a reputation for reliability and customer satisfaction in the Philippines. Sun Life has consistently been recognized as one of the top life insurance providers, committed to helping Filipinos secure their financial futures.

We offer a diverse range of products to meet various needs, including traditional life insurance policies like Sun Fit and Well, which combines life coverage with comprehensive health benefits, and Variable Universal Life (VUL) plans like Sun MaxiLink Prime, allowing you to invest while protecting your loved ones’ future. Additionally, we provide options such as whole life insurance, endowment plans, health insurance, senior care insurance, education plans, retirement solutions, single-pay plans, and many other types of insurance. This wide selection ensures you can choose the best products based on your unique financial goals.

With Sun Life, you have a trusted partner dedicated to guiding you through your insurance journey. Together, we can find the right plan that aligns with your goals and offers peace of mind for you and your loved ones.

READ: Sun Life’s Top Insurance Plans For You

Ready to Secure Your Future?

Life insurance is not a luxury—it’s a necessity, especially in these uncertain times. It’s the best way to make sure your loved ones are taken care of, no matter what happens. Let’s work together to find the right plan for you and your loved ones.

Contact me and let’s talk about how we can secure your future today through life insurance.