The need to protect

In the arena of financial services, the need to protect is not the top priority of most people. Insurance continues to be a service that is misunderstood – we also distrust it, avoid it, delay it, and are generally apathetic towards it.

The Philippines still continues to have the lowest percentage of insured individuals. This is not good because in the risk management arena, insurance remains the best.

The country's insurance industry is older than the republic itself, yet we continue to lag behind many countries when it comes to insurance.

A high percentage of progressive countries' populations are insured. Is it about affordability? To a great degree it probably is, but to a great degree it isn't, either. How many Filipinos have a mobile phone, or even two? I am sure there are more Filipinos with cell phones than an insurance policy. This is an issue of education and priorities.

Do we really need protection? Yes. Do we need insurance? Definitely.

Do you value your property? If you do, property and casualty insurance is the best form of risk transfer. One event can cause you immeasurable damage, financially and emotionally. Owning a home is truly a Filipino dream and many of us will go to great sacrifices to acquire one. Yet, once acquired, do we go through the necessary notions of protecting it? Home owner’s insurance, along with car insurance, is not only a prudent idea, it is a wise decision. The risk of loss, though low in frequency, is definitely high in severity.

A simple test

Do you need life insurance? If you die, how long can your dependents survive? If they can't even get through the next few months without your income, you really need life insurance.

Here's what you should do to know if you need life insurance: Get a sheet of paper and draw a line in the middle of the paper, crosswise. Try to think of all the things you need to pay for just in case you meet the Creator. On the left side, list down your debts, hospital expenses, burial costs and three months' worth of monthly expenses and get the total. You may label them as "final expenses."

Do you have children who are in school? Count their remaining years in school until they graduate from college. For example, if your child is already 10, he probably would still need 10 more schooling years. Try to approximate the cost of education today, inclusive of non-tuition costs like school service, daily allowance, etc. Assuming you spend about P40,000 per child per year, multiply that amount with the remaining years until he graduates. Do the same for every child. You don't need to compute for the future value of education, as we are just trying to ascertain the cost of education in today's costs. Get the total and label it "educational fund."

Lastly, try to compute your monthly budget. How much do you need just to get by, less the cost of education? Get the annual equivalent of your monthly budget and divide it by a modest investment rate, like seven percent.

Example, P20,000 a month or P240,000 a year divided by seven percent will amount to P 3,428,571. If you have that amount and you invest it at seven percent a year, you can cover your monthly expenses for many years. Label this as "income replacement." Get the subtotals of final expenses, educational fund and income replacement and add it all up; the total will be your "needs."

On the right side of your sheet of paper, try to list down all your assets that can be used to pay for your needs. They are cash, deposits, liquid investments (stocks, unit investment trust funds, mutual funds, etc.), real estate (but only if you decide to sell it, do not include your home), other investments and insurances (include group insurance). Get the total, and it will be your "sources." The difference between your "needs" and your "sources" will be your "shortfall" or "surplus."

Now that you know your shortfall (if any), you must increase whatever is in your right column (cash, savings, investments, etc.)

Bridging the gap

The fastest, cheapest and most convenient way to bridge the gap between your shortfall and needs is getting life insurance. It doesn't have to be an expensive endowment, variable life, or whole life insurance, term will do just fine.

I know a lot of us will say that we can't afford insurance, but it is just a matter of rearranging priorities, budgeting and making sacrifices. Insurance is bought not because someone must die, but because someone must go on living. Insurance ensures that the dreams of the most important people in your life are kept. We really can't afford to live without protection and without insurance.

Photo: “insurance” by Alan Cleaver, c/o Flickr. Some Rights Reserved.

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