Do people know exactly how much they really need when they are going through? In fact, people make assumptions about how much they need and want to leave behind. Taboo as it sounds – this is not an ordinary topic among ordinary Filipino families – but it is something to keep the next generation in the know.
In the life insurance industry, the amount guaranteed is also the death benefit of a life insurance contract. Unfortunately, the prevalence of life insurance is still very low in our country. Hence, literacy related to life insurance is also low. There are times when a policy is bought just because a close relative or friend has viewed the program and they feel obligated to return the favor.
The question is: Can someone decide how much they need for death benefits? Yes of course, but by taking into account the known factors: income substitution; educational support if there are minor children; final hospitalization fee; And finally the potential cost of the funeral.
However, things are still unknown, such as when a person will pass and how. Terrifying as it sounds but the facts of life sometimes hit us in the face right before they even happen.
A client recently asked me how much of a “certain sum” he should make sure his family would be fully supported in the next 10 years even without him. We’re starting to figure out how much he’s willing to support each month even without him there and he said, at least P60,000 or P720,000 annually. By factoring in an average inflation of 5 percent each year, that’s roughly 9.057 million pesos.
There are a lot of life insurance policies that are cash flow friendly to achieve this goal depending on the life of the life insured and depending on the life insurance product to be used. Sometimes it can be difficult but it is still better to prepare something than to do nothing at all.
There is also another strategy called enduring support. That is, you decide how much you want your heirs to receive each year divided by the interest rate. As for the interest rate, suppose it will be the same as a term deposit because when death benefits are received, the truth is that the heirs will not yet know how they will budget life insurance proceeds. Politics because the final expenses can be overwhelming.
For example, if we take the annual expense of 720,000 pesos and divide it by 2 percent, assuming it will be placed on a term deposit, that is, 36 million pesos. No wonder some Filipinos try their luck in the lottery in the hope of providing for their families permanently.
Another strategy is to take the example above: $720,000 per year considering your resources like income from business, royalties, pensions, company insurance benefits, and other passive income that can continue even without you. After deducting all resources, this is the time to calculate your life insurance coverage.
With this approach, the life insurance requirements would be lower, as an example, a previous client of mine had a real estate rental income of P40,000 each month, so using the example above, the target monthly support is P60,000 per month, minus APR 40,000 The monthly rental income and the amount to be increased is only 20,000 pesos.
Using the life insurance income replacement strategy, and also taking into account inflation at five percent per annum (5 percent), the heirs can be covered for ten years by life insurance proceeds of about 3.02 million pesos.
It may seem difficult, but it will be easy once you decide to sit down and consider how you want your heirs’ life to be. Also, it will always help to seek advice from a registered financial planner.
Can you get rid of sadness once you are gone? Of course not, a lot of times people just learn to live with grief, but it will help them move forward if they don’t burden themselves as a place to get money to pay their last respect to a loved one who hasn’t prepared anything at all.
After all, life insurance death benefit is something that should always be discussed with your life insurance agent, by which time peace of mind is always in place.
Jendee de Guzman is an RFP registered financial planner in the Philippines. To learn more about personal financial planning, attend RFP 97th August 2022. For inquiries, email firstname.lastname@example.org or text 0917-6248110.