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.
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.
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?
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.
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.