lesson #2: not all life insurance are created equal

after fessing up about my credit card debts and getting the collection agencies to agree on a repayment schedule, i did a headway with my second job.  i loved the work; the pay was good (it was twice as much as my last employer); i enjoyed working with my boss (who also became my mentor).  the only problem with the second job was that it was in Laguna and driving from home (in Makati) and back was starting to take a toll on me.  when an opportunity to join an american company based in Ortigas popped up, i took it and never looked back.

at that time, i already paid all my debts and have been debt free for close to a year. i had no credit cards so i was making all my purchases in cash.  i have also increased my market value to twice as much as the salary my second employer offered to me.  this enabled me to do a lot of things that was difficult before. i was able to fund the college education of two of my siblings.  i was able to afford a holiday for the entire family. i could finance without blinking an eye our noche buenas and new years eve celebration. i was able to afford a hobby: scuba diving (and boy, did i scuba dive a lot!). i started to travel and explore and i liked it.  i got very comfortable with the  idea of not ever have to worry whether i have enough money for my sibling’s tuition or for that holiday i want or for the rent and utilities.

then one day as i was driving home from work along C-5 highway, i passed a car sandwiched between a truck and an SUV.  i did not see the blood but i did not need to; no one could have survived the impact of that crash.

i started thinking about what would have happened if i was the one in that car. as with most Filipinos, i did not like entertaining the thought about death and dying.   at that moment, though, i thought about what will happen to my family if i die early.  i am pretty sure they will grieve over my death.  i am pretty sure my parents could find a way to send all my siblings to school (i am the eldest in the family of six) but i am pretty sure it will be tough for them.  and with my increased earning power, i have also brought my lifestyle and that of my family at a huge improvement from two years before. they will lose that, too.  i was very uncomfortable and sad thinking about it that i started asking myself if there actually is an inheritance i can leave to my family if i die too soon.

the only life insurance i had at that point was a Php500,000 whole life insurance i got two years ago.  my reason for taking insurance has nothing to do with providing for my family in the event of my demise.  i took my first insurance policy so i would feel a part of my earned money is at least going somewhere. there is a much more serious and important reason to take out an insurance and that is not one of them.  during that time, however, that was how i ended up with the only whole life insurance in my bucket of insurance(s).  i paid Php10,000/year premium for that coverage, with a self-liquidating feature. i got it from an agent who somehow got hold of my number through referrals.

if i died then, that Php500k could disappear quickly and leave my family with nothing in less than a year.  i felt that my desire to help my parents provide a better life for all of us is wanting if i am only going to make that a possibility while i am still alive.  i felt the need to address that and so i did.

learn the basic types of insurance coverage

i called up the same agent and told her i can set aside another Php20,000/year in premium payments for an insurance.  at that moment, i already did a lot of research and found out that the first policy i got was called whole life insurance.  although it was marketed as having a self-liquidating feature, my responsibility for the annual payments can be revived if the earned dividends will not be enough to cover for the annual premium.  in whole life insurance policies, you pay the same premium every year for as long as you live, otherwise, your insurance coverage lapse. 

another alternative to whole life insurance is called term insurance.  term insurance comes in many form but the simplest way to describe them is that it is an insurance policy that covers you for a specific time period.  once that covered period is over, the insurance lapse. the more popular term insurance have guaranteed cash values at the end of the term and have pre-determined number of payments (five, seven, ten, fifteen).   for example, a term insurance plan would require you to pay Php20,000/year for the next ten years with a maturity period of twenty years, of which you will receive Php600,000.  this simply means that you pay the premium for the first ten years, you wait for another ten and you get the guaranteed cash value at the end of the twentieth year.  that is, if you are still alive by then. if at any point during that twenty-year period you die, your beneficiary will get the face amount of the plan (which is often the same as the guaranteed maturity value of the policy). accidental death benefit usually double the face amount so if i was that person in that wrecked SUV and i have had this plan at the time of my death, my beneficiary would receive Php1.2MM.  after the twenty-year period, the insurance ceases.

the succeeding six insurance policies i took out in the five years that followed were all term.  and they will all lapse before i turn 50. that means, before i turn 50, i would have gotten the guaranteed cash value of all these insurance policies but i will also become uninsured.

the second alternative to the whole life insurance called Variable Unit Life (VUL) insurance has gain popularity in recent years.  VUL is a yearly renewable insurance that has an active investment component attached to it.  how does it work?  you, as a policy holder, chooses either a five year or a ten year payment period (these are the popular ones) and a premium payment you can afford.  your insurance coverage is an x factor of your premium (it can be up to 20x of your annual premium). a part of your premium payment will be allocated to an investment of your choice (equity, bond, balanced).  by appointing the insurance company to invest your money for you, the insurance company will charge you a premium load and annual management fees.  Premium loads are very material in the first few years of your policy (40%, 30%, 20%, 10% of your premium payment are deducted during the first to fourth year, respectively).   this simply means that if your annual premium is Php60,000, forty percent of that will be withheld by your insurance company as the premium load. on the fourth year, ten percent of that is withheld.      on top of the premium load, the insurance company also charges you an insurance cost and other fees that you normally does not notice in whole life and term insurance because they have already been factored in the premium payments you pay every year.  considering these charges when picking the type of insurance you want helps in a sense that it will make you understand the cost of getting yourself insured.  but the more important feature of VUL that one must understand accurately is that the insurance cost of getting an insurance coverage you pre-determined when you sign up for the policy increases as you age.  unlike term and whole life, the amount you pay for getting covered Php1.2M  under a VUL increases as you age.

VULs are a thing of beauty and is the best type of insurance for certain type of people.  the insurance policy that i will be taking out starting this year will all be VULs.

determine the period you are most likely to need an insurance

no one knows when they are going to die, maybe except a (fortunate or unfortunate, depending on how you look at it) few.  for most of us, death does not call to make an appointment.  we do not know know when we are going to die but we always know if:

1. we have someone financially dependent on us

2. when this someone (or group of people) will continue to be dependent on us

the only reason you will take out an insurance is to provide financial assistance to people you love in the event of your untimely death.  there is no other reason.  if an insurance agent urges you to take a life insurance for investment purposes, do not entertain that agent. he either does not understand what he is selling or he is full of shit.

insurance is not an investment

people often confuse insurance as a lazy form of investing.  i know of people who take out insurance solely on the basis of the guaranteed cash value (i am not proud of this but this was the tactic i used in the early years of insurance shopping). i know of people who would frown at an insurance proposal and would claim they could get a higher return investing money in the stock market.

the only reason you will take out an insurance is to provide financial assistance to people you love in the event of your untimely death. there. i said it again.  you do not take an insurance because you want to invest for your retirement years. insurance and investment are entirely different things (but that does not mean they cannot be combined).  as a comparison, think about that vehicle insurance you are paying for your car.  at the moment, i am paying around Php25k/year insurance premium for my Sta. Fe. i am paying that to cover myself in the event someone decides to carnap my SUV. i did not take that insurance thinking i will make money out of it. i wanted peace of mind when bad things like that happen and for that peace of mind, it cost me Php25k/year.

you sign up for an insurance to protect your dependents for any financial windfall they may experience due to your untimely death.  if you have no dependents or if you have enough liquid assets to secure their future, you are a lesser candidate for getting an insurance policy. but if you are a breadwinner in your twenties or thirties and you have no liquid assets to your name,  envision the future of your loved ones after your untimely death and ask yourself if that is the kind of financial situation you would want to leave them with.

probably not.

i have asked the same thing a few years ago and every year thereon.  that was how i figured out how much insurance i should have and what kind of insurance product i should get.  all about that in my next post.

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