Life Insurance Basic, Traditional, Investment and Linked

Insurance. We all need it. But is it clear to us why, exactly? Essentially, insurance is Protection. But what does it protect us against? 

Every family has a breadwinner. At least one, or two, if both parents earn income. Now, there are four threats to a breadwinner’s capacity to earn income: premature death, disability, getting diagnosed with a critical illness, and old age (retirement).

Insurance is a way to protect the family’sincome and way of life from these threats. This is what’s called “Family Protection”. There are multiple types of life insurance products. Let’s zero in on two: traditional life insurance and variable unit-linked life insurance also called investment-linked life insurance. Let’s break it down further. 

If you have what’s called Traditional Life Insurance, you are provided a Protection benefit plus savings equivalent to a cash value. Cash value allows you to loan from the savings to spend for a need like: 

- A source of cash for certain purchases

- Emergency fund

- Supplement for retirement funds

This cash value is also called a “living benefit” because you enjoy it while you are still living. Do note however that interest charges still apply to policy loans, and if you are unable to pay it back, this will be deducted to your death benefit, so we must be responsible when enjoying the “living benefit”.

There are two types of traditional life insurance: permanent and temporary, also known as ‘whole life’ and ‘term life’.  Whole life insurance covers the insured person for their entire life. He or she stands to receive the death benefit or payout upon passing away. There are three types you can choose from, depending on the payment period—there’s regular-pay, where you have to pay for the whole life coverage for your, well, whole life, too.

Then we have the limited-pay, where you will pay for the whole life coverage for a limited time only, say, 5, 7, 10, or 15 years. Lastly, we have the single-pay, where you will pay for the whole life coverage once. Whole life also gives the insured the chance to accrue cash value in the form of savings or earnings. On the other hand, term life insurance only guarantees the death benefit for a limited period of time, say within 1, 5, 10, or 15 years only. 

At the same time, you are only required topay for the plan during the years you are covered, too. So for term, if the insured survives beyond the period specified in the plan, then the protection benefit expires. However, the insured does have the option to renew the Term Life insurance for another term if he or she wants to continue it Now, what about investment-linked life insurance? 

As its name suggests, this type of life insurance has an investment component on top of the protection provided.  It also requires higher premiums than traditional products because a portion of it is set aside for funds invested in stocks, bonds, and/or other types of financial assets managed by expert fund managers. You should select a fund that matches your financial objectives and risk appetite. This living benefit or cash benefit is known as fund value. 

Because of this feature, investment-linked life insurance offers potential faster growth of your money versus the traditional products and their cash value. But it also comes with investment risks, which means it does not guarantee returns. If your chosen fund does not perform well, it will grow less than expected or may even decrease in value. You may need to make additional premium to keep your policy active. And so, the value of your investment-linked life insurance funds may decrease due to several  reasons including Extreme downward market volatility, Withdrawals, Charges when policy is  surrendered before its maturity And others. 

Upon maturity of the investment-linked policy,the policy owner also gets a maturity benefit.Investment-Linked Life Insurance is also more flexible. Depending on your risk appetite, you personally decide which fund you’d like to invest in, and switch to a different one should your financial goals change. This allows you to take charge on what you want to use your potential earnings for. Both Traditional Life Insurance and Investment-Linked life Insurance have benefits and risks But your decision on which to choose should depend on your overall financial plan and goals.