How Much Life Insurance Coverage?

It is not uncommon that sales agents would just offer you a proposal for life insurance with a face amount of P1 million. You may think that P1 million is already big but if the insured individual is the sole breadwinner of the family, his demise will potentially wreak havoc to the finances of a family who is just left with P1 million to budget for their daily subsistence, education of the children, for funeral expenses, payment of loans and credits, etc. That P1 million may just easily vanish in thin air especially if the lifestyle of the family is high.

So how do you practically compute for your life insurance coverage or in other words, how much life insurance do you really need?

Let me give you a basic guideline. You must compute for the total protection needs by identifying these needs:

Immediate Needs - Before the insured dies, there are expenses which you can assume that may have to be covered like:

• Hospitalization
• Funeral/ Burial
• Mortgage/ Liabilities
• Estate Debts

Educational Needs - If you have no education fund for the children, you must include this in the insurance coverage. You may opt to include just college education fund for all your children or you can include in your estimates the high school educational expenses as well.

Replacement Income - You can compute this by the monthly contribution that you give to the family multiplied by 12 and divided by 0.08. This is the amount that they need to invest in an instrument that will give them a yield of 8% so that they can live on the interest of your insurance.

Adding all the values computed from above will give you the total protection needs that will be equivalent to the face amount of your life insurance. The beauty of life insurance is that you do not need to pay this much to the life insurance company in order to get that much amount of insurance coverage. Ask your life insurance agent how much premium you need to pay for that amount of coverage and have him or her compute for term, whole life and variable universal life and see which among these you can afford for now.

You can also decrease your total protection needs by deducting your current assets which your family may be able to use, should the unexpected happen. Examples of such sources are:

• Peso cash and placement
• Dollar cash and placement
• Any existing life insurance (group or company)
• Real estate

This will decrease your required protection needs and you can just get additional life insurance based on your computed shortfall.

I strongly suggest that the one who computes for the insurance needs is the household manager which I presume would be the wife because she will have a better grasp of how much insurance protection will be needed by the family especially the children should the breadwinners meet an untimely death.

What Kind of Life Insurance?

How do you choose the kind of life insurance that is most suitable for you?

Do not depend on the proposal that is handed out to you by a life insurance agent. Determine the kind of life insurance that you need.

If you are single, have no dependents and still young, the most likely reason for you to get an insurance policy is to avail of the lower premium. The younger you are, the lower is the cost of insurance and the easier it is to become insured. Eventually you have the plan of getting married and having your children. The most advisable life insurance for you will be the variable universal life insurance. It will give you the flexibility of increasing or decreasing your insurance coverage in the future. It also gives you the chance to invest in equities which will potentially earn greater yield in time. Since it is presumed that you have more cash at your disposal, you can well afford this kind of insurance.

If you are at the early stage of family life where budget is tight and you have many other financial priorities, you should get a term insurance. A lot of people at this stage tend to discount the importance of an insurance since dying seem too far off. Yet it is precisely at this stage wherein a great financial devastation can occur should the breadwinner meet an untimely death. With the big burden of financial obligations to the family, the loss of the breadwinner is truly crippling. If you care enough to insure your car, you should care enough to insure your life. It is totally irresponsible to overlook this need and simply disregard it. Other people insure themselves for the sake of getting an insurance but the coverage is miserably low that it can only actually just cover for the funeral expenses and the hospitalization bill if the untimely event should occur. There is not enough to replace the lost income, much more to cover for future needs such as the education of the children. The good thing about a term insurance is that it is very affordable and gives the maximum protection for the family. If started early enough, the premium is low and it can later be converted to a whole life policy when the family can already afford the whole life policy which offers not only protection but also savings. When converted to a whole life policy, there is no need for insurability if the coverage is the same. That is the beauty of a term insurance converted to a whole life policy.

There are also what you call riders. These are additional benefits that you can attach to your basic insurance policy. For example, a critical illness benefit is a rider which gives you a big amount of protection in case you are struck with a critical illness included in the insurance company's list. There is the more common total disability benefit which ensures premium coverage even when the insured can no longer pay for the premium because of disability. There is also the accidental death and dismemberment. Other riders are hospital income benefit rider and female benefit rider. You should ask your agent the different riders being offered by the company and choose the rider which you think you would have great need for.

Life insurance is also very useful for estate planning. High income individuals with many properties can get so much for their money by just buying an insurance instead of paying for estate taxes, donor's taxes or capital gains' tax. I believe life insurance is the 9th wonder of the world because it gives you instant cash when you need it the most and you do not even need to invest the same amount to be protected for that amount. You may wonder what the 8th wonder of the world is. It is compounding interest.

Prevention is Better Than Cure

I tend to get frustrated when people simply refuse to listen when I start talking about life insurance. I just do not know why there is such a bad perception about life insurance. My only suspicion is that people view insurance agents as just mere salesmen who are out there to make a sale. So when they hear about insurance, they immediately associate it with an expense which they will never benefit from. It's as though the only person who will benefit from the insurance is the beneficiary who will enjoy the benefits at the expense of the insurer's death.

Actually, I am also guilty of this perception... until I became a financial planner. Then I was able to see the value of insurance as a tool for risk management and not just a product that are being sold by salesmen who are out there to make commissions. The first talk that I heard about insurance came from a preacher who does not sell insurance. I guess that was the factor that made me a believer.... that the speaker was trying to sell an idea and not a product. And it was funny that the second talk I heard about insurance came from someone who said "don't tell me you don't believe in insurance because insurance is not a religion." That struck a sensitive cord in me. And finally, when I finished the financial planning course, I came to realize the value of insurance not just for the living beneficiaries but also for the insurer.... i.e. you do not need to die in order to benefit from your life insurance coverage.

I affiliated myself with an insurance company in order to dig deeper into the many facets of life insurance and the different types of life insurance with the sole purpose of finding the right insurance for me and my husband. Again, I am guilty of having a lack of trust for insurance agents. I wanted to see and study the products for myself. However, in the process I got a first-hand experience of my own behavior towards life insurance agents when I got the same response from my friends when I started to talk about life insurance. It was truly frustrating. As a financial planner, I know that some of my friends are treading on dangerous grounds with such a lack of foresight and a limited knowledge about risk management. It's as though they are immortals! Then I realized that perhaps it is because they do not know the different types of life insurance that are available in the market.

Term insurance will provide for their beneficiaries if they die young at a cost that is very affordable. Whole life insurance has the the cash value which they can use while they are still alive. Variable universal life insurance gives them the option to invest in equities and securities at the same time have the protection they need in times of untimely demise. There are other living benefits which some life insurance packages offer such as total disability benefits, female and maternity benefits, critical illness benefits, hospital benefit. These vary from one insurance company to another.

If you are as paranoid as I am, then sign up as a life insurance agent in one respectable and stable insurance company so you can study the products for yourself. Insurance is a real preventive measure for financial disaster and it can really protect a family from such an unfortunate event of untimely death of the breadwinner. You do not need faith to know that this is true, you only need common sense.