We already know that Life Insurance should always be part of your personal finance strategy, everybody is talking about it, and all personal finance gurus are recommending it.
However, how should you start your journey in getting one?
Let me guide you through the things you should do, step-by-step.
Before anything else, there are few things you need to ask yourself to ensure that you will get what you need.
Have an inventory of what you have.
To have a better understanding on what you need, it is best to have an inventory of all assets and liabilities that you have.
These inventory should include the following:
- Cash In Bank (all banks including payroll accounts)
- Real Estate properties (indicate a market value)
- Insurance Policies
- Investments (Stocks, Mutual Funds, Businesses, etc…)
- Liabilities (bank loans, credit card debts, etc…)
Be honest to yourself. These information will help you understand where you are financially. As you will notice, you’ll be creating a personal Balance Sheet.
Understand your cash flows – your income and your expenses.
First step is to list all your income sources, no matter how small. The purpose is to have the most accurate understanding of how much money is coming in.
Next is to classify your expenses. Separate fixed and variable expenses.
Fixed Expenses are those expenses that you can no longer decrease, well, because they are fixed. Example of these expenses are your monthly rent, car amortisation, postpaid plans, cable tv bills, etc…
On the other hand, variable expenses are those expenses that you have control. These are the expenses that you may increase or decrease . Example of these expenses are your allotment for food, transportation, excess of your postpaid plans, etc…
Identifying your variable expenses will allow you to understand how much you can adjust and bring into savings.
Identify how much you can set aside on your monthly budget.
Upon analysing your cash flows, identify how much the maximum amount you can save on your monthly budget.
If you are happy on your current cash flows, that’s good.
If you wish to minimise further your variable expenses, then check how much further you can save.
At this stage, you should already know how much you can set aside.
List down your financial goals
Money is just a means to an end, a tool that we use to fund some life’s needs, wants, and experiences. That’s why it’s very important to identify what we are really trying to accomplish so that we’ll know how much we are targeting, and what we can do to ensure we meet those goals.
In identifying financial goals, it’s best to classify their term – either short term, medium term, or long term, and find balance in all of it. You may use the following as a guide:
- if the goal is targeted in 5 years or below, classify them as short term
- if the goal is targeted in 6 to 10 years, classify them as medium term.
- for goals that are targeted in more than 10 years, classify them as long term.
In this goal setting process, always allot something for your retirement, and if you have children, an education fund for them.
Identify how much life insurance coverage you need
It’s very important to identify how much coverage you need to ensure that you won’t be purchasing more than what you need.
For a basic computation, you may get your annual expenses and multiply that by 10. What comes up is your ideal life insurance coverage which you should be trying to meet.
If you currently have debts, add that, and subtract any existing life insurance coverage you may have.
Allot a specific budget for each goal that you have
Prepare an initial budget on how much you’ll be allotting for a specific goal to ensure that you have something set aside for each of the financial goals you want to achieve.
Now that you are done identifying where you are financially and the resources that you have to plan for the future, it’s time to check out the life insurance company/s that you may want to transact with.
One way to do it is to visit the website of the Insurance Commission and get a list of legitimate Life Insurance Companies here in the Philippines.
For easier and more reliable reference, just select from the top companies.
- Sun Life Financial
- Insular Life
- Pru Life UK
- Philam Life
- Axa Life
You can never go wrong with either of these companies.
To be able to transact with the Life Insurance Company that you have chosen, you need to find an Insurance Advisor/Financial Advisor/Insurance Agent.
You may know a friend, a relative, or a family member who is an advisor. If not, you may send us a Request for a Life Insurance Quote and we’ll send a Financial Advisor within your area.
The job of an Insurance Advisor is to analyse your current financial situation and your goals and match financial products that could help you achieve your financial goals.
The question is, what should you be looking for in an Insurance Advisor?
Here are some characteristics that you should consider your Insurance Advisor should have.
The main task of a financial advisor is to understand your unique personal circumstances and develop a program that will help you achieve your financial goals.
Competence pertains to knowledge about personal finance as a whole and knowledge on the products they represent.
If possible, look for an advisor who distributes both Life Insurance and Mutual Fund products to provide you more options – but not really a deal-breaker.
Visibility and accessibility
An insurance advisor will become your representative in the company that you chose. It is best that they are always accessible to address your concerns – either personally, or through their staffs.
Although customer services of the insurance company that you may choose are always available to help, it’s easiest to talk to the advisor who helped you with your policy (or their staffs) to speed up in addressing your concerns.
This goes without saying.
Since this is a conversation about money, it’s mandatory that you trust the people you transact with.
Just ensure that every transaction with a financial advisor is supported by provisional receipts issued by their respective companies.
Find an advisor who is trying to share their knowledge and expertise through their own websites or other platforms. More often than not, these advisors are committed to bringing themselves to the public for visibility, accessibility, and exhibition of their competence.
These advisors are keeping a reputation by being a public image, thus could be very trustworthy (not a guarantee though).
As I have mentioned earlier, the role of an insurance advisor is to identify where you are currently in your finances, understand what are your current resources to help you move forward with your financial goals, and develop an actionable program that will suit your personal circumstances (preference, budget, behaviour, etc…)
The job of an insurance advisor is to keep asking. Here are some questions he/she will ask during your meeting.
- Do you have any existing life insurance policies?
- Do you have any investments? (paper assets, real estate, businesses)
- Do you have children? How old?
- How much is your monthly income? Monthly expenses? Monthly savings?
- How are you managing your finances?
- What the other assets you may have? Any liabilities?
As you will notice, the answers to these questions are present in your personal Balance Sheet and Income Statement.
You may answer these questions, or you may not. It’s up to you.
The ideal scenario is that you already have computed what you need (kindly refer to your computations in section 2), and how much you can shell out monthly, quarterly, semi-annually or annually, for the said policy.
You can just send these information to your insurance advisor so he/she can create a program that will fit your budget and preference.
For better understanding and in order for you to explore your options, it is best to meet an insurance advisor personally.
As I have mentioned earlier, the role of an Insurance Advisor is to understand your money preference and your needs, then create an insurance program around it. We refer to these insurance programs as Life Insurance Proposals or Life Insurance Quotes.
During the course of your discussions with the insurance advisor, you may end up having several proposals on hand that could be overwhelming to review.
Now that’s a challenge. Which one will you pick?
Here’s the general rule: choose the policy that will meet your objectives.
People choose different insurance programs based on their unique individual preference. There is no exact identifier on which is best to choose, but you may just take note of the following proposals that may be given to you:
Term Insurance (most inexpensive but no savings/cash values)
This type of insurance is like a car insurance – you’ll pay for it as long as you want it. It will not accumulate savings or fund values.
Good thing about Term Insurance is that it provides the highest life insurance coverage for the most inexpensive rate.
For some people, what they don’t like about term insurance is that it’s like spending for something without any expectation that they can get something in return.
Endowment Insurance (Life Insurance plus savings but limited duration)
Aside from the basic life insurance, Endowment Insurance provides a savings component that gives the policyholder a specified amount after a specified year – say you’ll be receiving P50,000 starting the 10th year upto the 20th year.
You’ll also be entitled to yearly dividends.
This proposal is more pricey than term insurance and offers a very limited life insurance coverage period, usually 20 years. Unlike the first proposal though, you’ll be receiving a lump sum of money at the end of the term, usually higher than what you will be paying for the whole policy.
Whole Life Insurance (Life Insurance with Savings, for life)
Very similar to Endowment Insurance, but this insurance policy last for a lifetime, well at age 100.
It’s a bit pricey, same as endowment, but over time, you’ll get what you have invested, slowly.
Variable Universal Life Insurance (Life Insurance with Investment on stocks and bonds)
This life insurance proposal is a combination of life insurance and mutual funds. I have written great details about this type of life insurance here.
Once you have already decided which proposal to pick, you may start the application process with your insurance advisor.
Here’s how it will all go:
Fill up the application forms.
Usually, the only requirement that will be asked from you is the initial payment, and a copy of one valid government ID. Be sure to have those ready.
For payments, there are usually different mode of payment available – monthly, quarterly, semi-annual, and annually.
Be sure you get a provisional receipt from your insurance advisor.
Also, you’ll be issued a Certificate of Temporary Life Insurance that signifies that your life insurance is temporary effective until the policy is approved. This just means that even if your insurance application is still for processing, you’re already insured, subject to restrictions set individually by each insurance company.
Ensure that you declare everything that needs to be declared – medical conditions, history, smoking habits, etc…
Failure to declare these things might cause headaches in the future for your beneficiaries. You may refer to the Two-Year Contestability Clause.
Also, if you’re an OFW, ensure that you are signing the documents within the Philippines. Signing application documents outside the Philippines might cause you troubles in the future.
The Insurance Advisor submits your application to the insurance company’s Customer Centres
From the point of submission to point of approval of your insurance application, it will take approximately 2 to 3 weeks to gain approval, depending on the life insurance company.
In between, there could be additional requirements to be asked by the approving departments of the insurance company (aka underwriters). You might also be asked to undergo Medical Exams.
Don’t worry about anything. Any subsequent procedures will cost you nothing. Some people take advantage of these things to check where their physical health.
Once your application has been approved, you will be issued a policy contract.