In stage 4 of financial planning, I talked about basic ideas of insurance products. I am going to dig a little deeper about them. I am doing this because we, Pinoys, may have an idea or two about insurance in general but most of the time we really never completely understand what they are, their purpose and the critical role they play in personal finance.
What is insurance?
An insurance is a contract where an insurance company agrees to pay you or your beneficiaries a big amount of money in exchange for a small payment when you meet conditions of release.
Let me break that down.
Who are the people involved in an insurance contract?
- Insurance company, also called insurer, is the company that offers insurance products.
- Policy owner is the person who buys insurance.
- Person Insured is the person whose life or well-being is insured. Almost always, the policy owner is the same as the person insured. There are situations that this is not the case. In a group term insurance, the policy owner is the group or the company while the person insured is the member or employee. An example too is a wife (policy owner) who buys a cover for her husband or a child (person insured).
- Beneficiary is a person who will receive the benefits when the person insured meets conditions of release.
- Insurance Commission, though not really part of a contract, is the government agency that oversees all companies providing insurance policies.
What are you buying exactly?
You are actually buying an agreement that can minimize the impact of certain life crises, such as dying too soon, being sick or getting disabled. These are very costly, not to mention stressful, to you and your family.
When they do happen, the insurer is going to pay you.
The following provide details about some of the things that are common in any insurance product.
- Contract, also called a policy, is the written agreement between you and insurer. It lists down the things that you need to do, such as paying the premium and giving your information honestly. It also lists down what the insurer must do, especially when it is time to give the benefits.
- Premium is the payment to make the policy in force and stay enforceable.
- Face amount, also called sum insured, is the amount that the insurer agrees to pay you when conditions of release are met.
- Conditions of release are situations that when they occur, the insurer is bound to provide the face amount to you or your beneficiaries. Examples are untimely death, sickness or disability.
Who can buy an insurance product
In the Philippines, you must be 18 years old.
How to buy insurance?
It is easy to buy insurance. You can look up the companies that are duly registered with the Insurance Commission. You can also look at the ranking of the companies, so you can decide which one to pick.
Before buying any policy, it is important to ask the following questions:
- Why do you need to buy insurance?
- What type of insurance do you need?
- Important things you need to know about insurance