Most Filipinos in the working class are employees. And since a very common benefit from employers are life insurance and health cards (HMOs), the need to purchase a separate individual life insurance is no longer necessary, right?
Besides, if one already own a car, why does he need another one? That’s luxury! So if I already have a life insurance policy from my employer, why would I need another one?
Let’s put it this way (oh I love metaphors!).
Does having a job necessarily say we have enough resources to sustain our lifestyle?
Not necessarily. Few questions needed to be answered. First, how much do we earn? Second, how much do we spend? Third, how far do you want to go with life?
Or say you have one set of clothing (shirt, undergarment, pants, etc…). Does having a set means you have enough? Obviously not since you needed to be “covered” for the rest of the week.
For both comparison, answering the question “How much do we need or how long do I need it” is very crucial before we can say we have enough.
Life Insurance is not different, and definitely investments (but let’s reserve that on a different conversation).
Understanding the Need
Life insurance plays different vital roles in the way we plan our finances. We have to understand that the question is not if we have life insurance, the question is how much coverage do we have.
Let’s take a look of the most common uses of life insurance to help identify whether what your company provides is enough.
Life Insurance for Income Replacement
Alright, before you leave this page after reading yet another financial jargon, allow me to explain what this alien term means.
Income Replacement generally refers to the ability of life insurance to provide income to the family during an untimely death of the family’s breadwinner. Life insurance “replaces” the lost income of the breadwinner caused by an untimely death..
Now, say your company gives you P500,000 life insurance benefit, will that amount continue to feed your family, pay the bills, bring your children to school, and shoulder their lifestyle in the next say 5 or 10 years.
If you answer no (and I’m sure you will), then adding up more life insurance coverage is necessary.
Shouldering the Cost of Death
Everyone is different, we have different lifestyles, different views in life, different likes and dislikes, and a very long list of things we do differently.
There are two life experience that we are 100% sure that we share – we were born, and someday, at our own time, we will face death.
For people who are in the stage wherein they are still building their wealth, life insurance provides a safety net to ensure that an untimely death will not compromise the journey to financial independence of the family left behind.
Simply put, we take responsibility to fund the costs relating to our own death (morbid, I know, but it’s one thing we should openly talk about). Let us not be a burden to anybody else.
Now, does your P500,000 life insurance coverage from your employer would suffice the cost of death? Well, studies say it could take around 1M to 1.5M to cover the cost of death in the Philippines.
Protecting the fruits of your Hard Work – Your Assets
There’s one scary thing about dying with too many assets named after us. We call these horror Estate Taxes (Alright! I might be exaggerating too much).
When a person dies, all the assets/properties he have accumulated over his lifetime will be frozen by BIR until appropriate taxes are paid be the heirs. We refer to these taxes as Estate Tax.
“Frozen” means your heirs won’t be able to access your bank accounts, investments, and real estate properties. Without having the ability to access your assets, how could they be able to pay the Estate Tax?
That’s where life insurance comes in.
Using the same example, is your P500,000 life insurance coverage provided by your employer enough to pay the estate tax? Let’s put it this way, if you have successfully built your wealth through your lifetime and have accumulated P20,000,000 worth of assets (savings, investments, and real estate), P500,000.00 is not enough.
At most, you’ll be needing P4,000,000 life insurance coverage.
Add the fact that your life insurance coverage from your employer usually does not extend after retirement.
Now, is having life insurance benefit from your employer enough?
Given the above considerations, it’s not in most cases.
Having a life insurance benefit in your company doesn’t necessarily mean you have enough. You are dressed today, but not for the rest of the week.
Remember that the question is not if you have life insurance. The question is how much life insurance coverage do you have.
In the next articles, let’s talk about how to compute the ideal life insurance coverage that you should have in order to have a solid financial plan.