Understanding Life Insurance

Life insurance is a necessary asset we have to consider when we  are creating our personal financial plan. Protection is of utmost importance when we are building our asset portfolio, and a life insurance product can  just provide that.

 

Most Filipinos do not understand the value of life insurance. Most treat insurance as an unnecessary expense, but the truth is, a life insurance policy provides additional asset for the policyholder that would benefit his/her beneficiaries when the unforeseen happens.

 

Imagine this scenario:

Ruben*, 35 years old, an engineer working abroad, with a wife and a 3 year old son, just recently finished amortizing his house and lot worth 5 million. His annual income is P1,500,000. Typical of most OFW families, Ruben’s wife is unemployed since they decided that his income is sufficient to cover their expenses, and have a little extra for savings. Aside from their house and lot, Ruben bought a car for his wife during his last vacation. They are paying monthly amortization for their car, as well as some real estate assets that the couple decided to acquire for investment purposes. The couple dreams of sending their son to the best schools in Manila, with Ateneo de Manila University as the top on their mental list. Ruben also plans to have at least 20 million retirement fund on his bank account at the age of 55.  At present, he currently have 2 million savings on his bank account. Unfortunately, Ruben discovered that he has a kidney disease. His employment-sponsored medical insurance do not cover treatment for kidney disease which requires medications and weekly dialysis. Ruben has no option but to come home. Eventually, the 2 million bank savings are depleted because of the treatment costs. Some of the real estate assets are sold below market value so they can get immediate cash for his treatments. Eventually, Ruben succumbed to his illness and died. What will happen to his financial plan for his family?

 

In the absence of a life insurance coverage on his life, Ruben’s wife will have to deal with these issues:

  • the uncertainty of where to get fund for their daily expenses because the wife is unemployed and has difficulty of looking for employment
  • their dream of having an Ateneo education for their son is unsecured
  • since their bank savings were depleted because of the medical treatments, some of their assets were sold off
  • the wife needs to settle estate taxes on the properties on the name of Ruben, which is equivalent to more or less 20 to 30% of the market value of the whole estate.
  • if there is still money in the bank on Ruben’s name, this would be frozen or inaccessible to the wife, until all estate taxes are settled.

 

These are just some of the issues that most families of the deceased will be confronted with. The bottomline is that, in the absence of a life insurance coverage, the best financial plan we have for our family will be useless with just one unexpected event (illness, disability, death).

What would be the scenario if Ruben has a life insurance?

For example, Ruben bought a life insurance policy two years earlier. The advisor who sold him his policy advised that he buy a life insurance coverage of P7,500,000 which is equivalent to 5 times his annual salary. Ruben decided to get a VUL life insurance policy, payable for 5 years with annual premium of P200,000*. On the time of his death, Ruben only paid for 2 years of the premium (total payments made is only P400,000). But his family will get the death benefits equivalent to P7,500,000. Therefore, what would be the advantages to his family if Ruben has a life insurance?

  • A cash asset is created in the event the policyholder dies in the form of the death benefit proceeds.
  • They may have lost their bank savings and other real estate assets because of the medical cost, but the death benefit proceeds that will be claimed can help secure future expenses of the wife and son, for example, educational fund for the son.
  • Change in his families lifestyle will not be abrupt because the cash proceeds can be used for their daily expenses, a portion can be used to start a business so the wife can have future income.

 

A life insurance policy offers a lot of benefits depending on the type of insurance product, but the primary use of it is for protection. It is a product that offers the policyholder peace of mind. That should something happens to the breadwinners of the family, their dreams for their family will not die with them.

 

*for illustration purposes only. This could be any amount depending the type of product and company a person will buy a life insurance from.

 

Do you have any questions? Feel free to contact me.

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