Protecting your income: How much life insurance do you need?
MANILA, Philippines - At one point or another, you've probably been approached by an insurance specialist offering products designed to protect you and your family.
Before making a choice, a good question to ask would be if you actually need one. Life insurance is something that is usually paid out upon your demise to answer for the needs of your dependents, as well as cover debts you have left behind and even funeral expenses.
Following this logic, those without any dependents and those without any debts may not have a need for it. Remember, though, that your needs change over time. You may not have dependents or you may have no debt now, but how sure are you about how things will be ten years down the road?
If you have dependents, then there is no question about it: you definitely need life insurance.
Note that there are two kinds of products offered by insurance companies: whole and term insurance. Whole life insurance is in force for the lifetime of the insured and needs to be paid yearly. In the Philippines, arrangements are often made for the policy to be paid up in a number of years.
Term insurance, on the other hand, covers you for a specific period — from a year to up to 5 or 10 years. Think of it as something like car insurance. Once it lapses, you will need to get a new one or your coverage expires. Since its coverage is much shorter and is defined, it is much cheaper than whole life insurance.
One thing to remember about insurance is that it is much cheaper to get when you are much younger. If you’re 25 years old, you will be paying far less insurance premium for the same coverage than a 45-year old. For this reason, you may consider purchasing insurance even if you are still without any dependents.
If you have decided that it is time to get insurance, your initial question would most likely be how much insurance you should get and which of the variants out in the market will be best for you.
The amount of insurance that each person needs is an individual matter — what person A needs is different from that of person B. You will have to do an honest assessment of your current needs and project your future requirements to come up with an estimate of how much insurance cover you should get.
A simple way to do this is to look at your monthly expenses. List down everything that you have to pay for — food, utility expenses, household expenses, children’s tuition expenses, transportation, entertainment expenses, dues, rent, and amortizations. Assume that your monthly expenses come out to, let’s say, P30,000. That is the amount that your insurance will have to cover on a monthly basis. In other words, your family will need at least P360,000 a year in the event of your demise.
Most experts say that you will need insurance coverage of at least 10-12 times your annual earnings. This should provide for all your liabilities and represents your future earning potential.
If, in the above example, your expenses equals your earnings, then you will need insurance coverage of at least P3.6 million. Theoretically, this amount should, if invested, fetch a regular income for the surviving members of your family so that they are able to maintain their current lifestyle. More specifically, if the P3.6 million is invested, then it should fetch an amount that can tide your family, until the time comes when they are financially self-sufficient. Assume that this amount will earn 10% per annum, or P360,000 a year. This should be sufficient protection for your family.
Note, however, that your lifestyle will change as years pass. In all likelihood, your cost of living will go up as your family grows and as your income increases. This means that you should revisit your insurance coverage regularly to know if it is still realistically enough to cover your needs. Do this every time there is a life change — when you marry, when a new kid is born, when you have acquired property. In fact, do this every year as a matter of habit.
Remember to consult with financial experts in determining your insurance needs as well as in assessing your financial status. By constantly evaluating your financial status, you will be more enlightened on your needs as they change throughout your life.
Grow Your Money is an editorial partnership between ABS-CBNnews.com and Citi Philippines to promote financial education and provide helpful information to Filipinos on how to better manage their personal finances.
Visit www.citibank.com.ph for more information.