Do We Really Need Insurance?

Insurance has been in the news lately—well, at least, insurance companies are. The financial crisis in the US has got everyone spooked and those who have insurance policies have been quirky. Well, insurance policyholders should NOT worry as they are still covered by one of the most secure and controversial financial instruments today if they carry a traditional life-insurance policy.

The bigger issue for me that should be in the news is that the Philippines still continues to have the lowest percentage of insured individuals. This is not good because in the arena of risk management, insurance remains the best.

The insurance industry has been operating in the country and is older than the republic itself, yet, we continue to lag behind many countries when it comes to insurance.

It can be noticed that progressive countries have a very high percentage of the population insured. Is it about affordability? To a great degree it probably is, but to a great degree it isn't, as well. 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 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. We speak of educating the country on the value of home insurance, a truly admirable feat. But is every employee's home covered by some form of home insurance?

Do we need life insurance? Here's a simple test. If you are called for a meeting with the Lord and never come back, how long can your dependents survive? If your dependents can't even survive for 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 your 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 nontuition costs like school service, baon, etc. Assuming you spend about P 40,000 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 as "educational fund."

Last, 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 7 percent.

Example, P20,000 a month or P240,000 a year divided by 7 percent will amount to P 3,428,571. If you have that amount and you invest it at 7 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.)

Here's my tip: the fastest, cheapest and most convenient way to bridge that gap is getting life insurance. It doesn't have to be an expensive endowment or variable life, whole life or term will do just fine.

I know a lot of us will say that we can't afford insurance. Here's my answer: "Yes, we can." It is a matter of priorities, budgeting and 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 insurance.

By: J. Randell Tiongson, RFP