The main purpose of insurance in your life is simple: peace of mind. At almost every point in your life, insurance is something that can protect you in case of some unfortunate incident. But what is it exactly, and how does it work?
From the name, you can guess that it deals with uncertainty. There are many bad things that can happen to us, ranging from illnesses to accidents. Insurance gives you a financial fallback in case these things occur.
The concept of insurance has actually been around since ancient times, and has evolved tremendously. These days, you can insure so many aspects of your life, including your health car, and even luggage.
Kinds of insurance
In the Philippines, there are generally two kinds of insurance: life (e.g. term life insurance, personal accident insurance, critical illness plans, and variable-unit linked plans or VULs), and non-life (e.g. auto insurance, travel insurance, and fire insurance).
The different kinds of life insurance give payouts in the event of your death, dismemberment, or getting a sickness that leaves you unable to earn a living for your loved ones. Meanwhile, non-life insurance helps you recover in case of an unfortunate incident not involving your person, like your car getting stolen.
Both types of insurance function in generally the same way: you pay premiums to an insurance company. You are then covered against specific types of incidents.
If something bad happens, the insurance company will give you financial assistance. This comes either as a lump sum or by shouldering some of the costs brought by the incident.
Insurance and investing
Is getting insurance investing? In strict financial terms, no. Insurance is financial protection in case you experience loss, while investing is paying for an asset that you hope will grow in value.
VULs, however, let you do both at the same time. After a few months of putting money in the insurance policy, a portion of your premiums start going into a fund not too different from a UITF (Unit Investment Trust Fund) or a mutual fund. You could actually consider VULs as a way of “meeting in the middle.”
Some people say that it’s better to keep investments and insurance separate. Others argue that VULs make insurance and investing accessible by combining them into a single, affordable product. Both have valid points. As with many financial matters, there is no hard and fast answer.
For people with children, insurance is very important so that the ones without the means to fend for themselves will be protected. Those on the younger, no-dependents side of life might find it more worthwhile to start investing first (although insurance can be more affordable if you start earlier).
There are many ways to go about insurance. What you should do is understand your circumstances, know how your financial decisions affect your loved ones, and learn the details of the available financial products. After all, the easiest way to reduce uncertainty is to be informed.
