Do I Really Need to Purchase Life Insurance if I Already Have That Benefit From My Employer?

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?

WRONG.

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.

Why Life Insurance is an Indispensable Part of Financial Planning

We all (most of us) know the mechanics of how life insurance works. You buy it, when you die, you get money.

Simple, isn’t it?

But what’s not a common knowledge is the vast uses of Life Insurance as a great tool of not only planning our own finances, but also, in protecting whatever we had gained over our lifetime.

Let’s talk about them.

Why Insurance is an Indespensible tool

1) Taking responsibility of one’s own life.

I’ve read blogs discouraging single yuppies in getting life insurance, which I think (on my personal opinion) is quite careless and irresponsible.

For one, we should stop the idea that somebody will carry the burden during an untimely death. This thought will keep this country poor.

As much as we can, let’s take responsibility on our needs when we are alive, and try not to pass the burden when we die.

How much does a yuppy who supports nobody need to stack in his life insurance? One good reference point is this article of Pesos and Sense about the cost of dying in the Philippines.

2) Ensuring that life will continue for those left behind.

Head of the family, parents supporting a family, and persons where other people (young or old) depends on. These people needs more life insurance than just by taking responsibility of their own life.

This is mostly referred to as Income Replacement.

Income, what?!?

Alright, here’s the main concept. The moment a breadwinner of the family faces death, it’s not only a loss of the physical body, it’s also a loss of income generated by that individual.

It’s computed by several means. One way is to divide the annual income provided by the breadwinner by an acceptable investment rate of return.

Let’s say the breadwinner is giving P500,000.00 to the family, and an acceptable investment rate of return is 5%.

That will be P500,000.00 divided by 5%, which will result to P10,000,000.00.

That will be the ideal insurance coverage for income replacement, which, once received by the beneficiaries, will be invested in an investment that would yield the acceptable investment rate of return (5%).

At the end of the day, what’s important is that when we say we love our family, death should not end that love.

3) Ensuring debts will not be inherited.

Ever wonder why life insurance is required when getting a Housing Loan?

Yes, creditors use Life Insurance as a sort of a collateral to ensure that debts will be paid, dead or alive.

This is referred to as Mortgage Redemption Insurance (MRI).

4) Keeping your asset, well, yours (or to your heirs)

I’ve heard an interesting statement from somewhere, just can’t remember where.

It says, “If you are purchasing an asset, especially real estate, you should stack up an additional life insurance coverage equivalent to 20% of the Market Value of that asset. Remember that everytime you purchase an asset, you are giving a burden to your heirs/family, 20% of the market value as an estate tax when you die.”

That brings up the topic of estate taxes, which should be seriously considered when an individual is slowly building up his wealth.

Life insurance ensures that cash will be readily available to beneficiaries to pay for the corresponding estate taxes.

Any case, who would want that the fruit of their lifetime hardwork falls only to the hands of the government, auctioned in a very steep discount, just to pay for the taxes?

No one.

5) Leaving a legacy

Perhaps not the best use for Life Insurance, but nevertheless, some people use life insurance as a way to leave instant wealth to their family.

Well, for a fraction of a cost, life insurance proceeds could leave millions to the heirs.

Conclusion

Life insurance is indeed an indispensable tool in our financial planning, and should not be taken lightly. It is very useful in various stages of our lives.

To learn about different life insurance options, it’s best to talk to an insurance/financial advisor. You may request a FREE quote here, our network of Financial Advisors will be keeping in touch with you.