Choosing the right life insurance for you, part 1

By Randell Tiongson on June 25th, 2012

Question: What are the right criteria for choosing a good life insurance? – Jeremy Jessley Tan (@jeremyjessley) via Twitter

Answer:

Let me congratulate you first for your decision to consider life insurance. Although hugely important in personal financial planning, life insurance like many other financial instruments, aren’t really on the top of mind of many Filipinos. The percentage of our insured population is so low we are subjected to so much personal risk that will have a devastating effect to our lives.

I’m not sure if your query relates to life insurance programs or life insurance companies so let me just try to answer both.

Before buying life insurance, it is important to determine if you need one or not. If there are people dependent on your income like your spouse, children, parents or siblings, then chances are you really need one. On the other hand, if you are single and have no one who depend on your income – you probably would want to defer buying a life insurance policy until such a need arises. If you are considering buying a life insurance policy strictly as an investment, do consider other instruments that will suit such a need. Life insurance should be purchased because of the need to manage life’s risks, primarily against untimely death and serious physical breakdown (disability). Accumulation of life insurance fund values for investment purposes should only be a secondary reason – icing on the cake so to speak.

It is wise to first determine the amount of life insurance you need. A professional insurance adviser should be able to do an honest to goodness insurance needs analysis for you or better yet, make one for yourself. Here’s a simple way for you to determine the amount of insurance you need. On a sheet of paper (or excel sheet if you must), divide into two parts vertically. On the left side, put a heading and call it “Needs” and on the right call it“Sources”. Under the needs section, think of expenses that needs to be paid should you experience untimely death like hospitalization, burial costs, any outstanding obligation and about 3 months worth of expenses (label this as miscellaneous) – get the sub-total and label it as “immediate expense”. If you have any schooling children, it is best to determine education needs also as this will be a primary concern of those who you will leave behind. A simple way to do this is to get the estimated yearly educational and multiply it by the remaining number of years until they graduate. There’s no need to compute for the future value of education as we are merely allocation an educational fund that should be invested eventually. Label the sub-total as “educational expenses”. The 3rd and final component of your “Needs” section is determining the living costs of your loved ones. Multiply your monthly need by 12 to get the annual expenses as it is easier to plan on an annual basis. Divide the annual amount by an estimated investment rate. The sum is a fund that can be invested to give perpetual interest payments to be used for living expenses.

On the right side of your sheet called “Sources”, try to think of all the sources that can generate funds should the need arises such as cash, investments, real estate and life insurance proceeds. It may not be a good idea to include your home as a source of cash as your family will need to keep the home.

Deduct the total sources from your total needs and the balance is an amount you should consider for additional life insurance. Note that life insurance is not your only option to narrow the gap between needs and sources but it is definitely the cheapest and fastest way to bridge the gap. Life insurance can also be a temporary solution as you build your other assets like cash, investments and real estate.

Below is a simple illustration on how a life insurance analysis may look:

Now that you know how much you need, the next thing you need to determine is what kind of life insurance you should get and from which life insurance company should you buy from. I will try to answer those in the next instalment of this column.

… to be continued.

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20 thoughts on “Choosing the right life insurance for you, part 1”

  • “On the other hand, if you are single and have no one who depend on your income – you probably would want to defer buying a life insurance policy until such a need arises. If you are considering buying a life insurance policy strictly as an investment, do consider other instruments that will suit such a need.”

    Hi Randell, is it possible for you to make an full-length elaborate post about this? What good investments can single people do? Should single people be not interested in insurance at all? Is ULP not good for singles?

    Thank you. 🙂

  • Thanks Randell for the nice article! Surely, I’ll wait for the part 2. By the way, I have attended the Steps to Financial Peace Seminar last May 18. I have enjoyed it a lot!

  • hi,nikki: singles like you can benefit from a life insurance package bundled with an investment fund. i am a sunlife financial advisor and i can meet u to explain to you our insurance/investment packages or u can email me at: [email protected]

  • Hi Randell, I’m an orphan, only child and don’t have any dependents yet since I’m still single. What insurance plan can you suggest me to have?

  • Nikki,

    There’s a lot of investments you can do like stock market, forex, mutual funds, etc.

    These are passive income.

  • Hi Niki,

    When buying VUL, not all the premiums go into an investment fund since some goes to pay for insurance premiums, ergo fund accumulation will not be maximized. However, if there is a need for life insurance, then a VUL is a good idea. If there’s no need for life insurance, Mutual of UITF will be more efficient. Its a matter of suitability. Randell

  • Hi Niki,

    I guess being single you still need life insurance even if you don’t have dependents to take care of in case you disappear. Just imagine when you passed away, you still have immediate expenses like the burial. That needs money to be shell out so if you don’t have life insurance then your family will shell out money from their own pocket for your burial expenses. for a commoner, burial expenses would cost around 100 thousand pesos. This is why insurance is needed.

  • Hi Randell,

    Thank you for your nice presentation. I noticed though in your chart/table that the figures presented are not inflation adjusted. This may be a good basis to begin a life insurance program. But, to ensure that the coverage is adequate and up to date, it would be prudent for a financial planner/advisor to do a periodic review as our financial needs changes over time.

    Regards,
    Jun

  • Hi Randell ,

    Thank you for your nice presentation. I noticed though in your chart/table that the figures presented are not inflation adjusted. I do agree that this figure could be the basis for the initial coverage. However, I believe that to ensure one’s life insurance program is up to date, a periodic review with a financial planner/advisor would be helpful, as our financial needs and risks changes over time.

    Warm regards,
    Jun

  • Hi Nikki and Jing,

    Being single is the best time to get yourself insured. You’ve got a lower premium cost for insurance coverage, and more often gets approved with ease, as you may be at the best health condition to assure acceptability. Everyone needs life insurance coverage, as presented by Randell, there will be immediate expenses at death. Who will pay for it? Your parents? Besides, consider the hard labor your parents had to bear to give you the best things in life. Wouldn’t it be of your kindness and generosity to give them something back in return? Moving forward, if and when you decide to settle down and build a family, the need to provide for your dependents become real.. If you have an existing plan, your advisor will just conduct a personal financial review to bridge any gap, if any, from what you have and what you need.

    Finally, investment linked/variable life insurance plans have revolutionized the life insurance industry. Since it was first introduced to the Philippine Market in 2002 by PruLife UK, it’s now the best life insurance plan available and sought after by clients. It provides you the flexibility to increase/decrease your insurance needs, while investing your premium contribution in bonds, stocks or a combination thereof. The charges vary depending on the type of plan you opt for.

    Should you need someone to speak to regarding your personal & financial goals, please feel free to contact me at 09173256218 or [email protected].

    Regards,
    Jun

  • Hi Randell,

    First – I’d like to say thank you for putting up a very informative website like this one!

    I have a quick question. Two years ago I bought a VUL insurance. I am currently single, with no dependents and have no plans of getting married. I also think that my parents would be able support themselves if I die ahead of them.

    You stated above that with my situation, it would be more advisable to invest on Mutual of UITF. Would it be better if I let go of my VUL this early and redistribute my resources on Mutual or UITF instead?

    Thanks in advance for the enlightenment 😀

  • DonC ,

    Try to check if its cheaper to maintain your VUL as an insurance more than as an investment.

    Try getting quotations of separate insurance premium from other insurance company. Ask your VUL agent, what is minimum amount you should pay to sustain your plan.
    From there, you can find out if its still suitable to maintain your VUL as an insurance.

    Your parents may not need it, base on your opinion, but you can use it for your funeral expenses to relieve financial burden to your family 🙂

  • hi,
    last january kinuhanan ko po ng life insurance ung father ko sa st peter plan
    tama po ba na kinuhanan ko pa sya ng inurance he is in late 50’s no work and he depending on me.

    thanks..

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  • Ask for a “Financial Needs Analysis” assessment first from a licensed Financial Advisor of a prestigious insurance company. It’s a template that computes your financial needs from today and onwards, considering the inevitable “inflation rate”. I just had mine computed.
    And I realized a lot of things.

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Choosing the right life insurance for you, part 1