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I'll give you a scenario: Mr. A has two children not yet in their school years. To plan for his kids' college education, he has to earn Php 1,000,000 million pesos for each child which accumulates to Php 2,000,000. He just recently acquired a PAG-IBIG loan for the new house that he bought worth Php 1,000,000. He earns Php 300,000 a year. He also has an astonishing debt of Php 100,000 from his friendly neighborhood bombay. All in all, Mr. A's financial responsibility is to earn 7,100,000 to absolve all his financial problems.
Mr. A thought about the scenario of dying and leaving his family with having all these debts and responsibilities as a breadwinner. A friend of his who is an insurance agent offered him a Whole Life insurance with the premium of 7,500,000 in case he dies but he has to pay Php 300,000 a year in ten years. Mr. A didn't really had that much money so he opted to get the whole life insurance with a premium of Php 300,000 which he would pay 25,000 for ten years. Mr. A signed and got approved of his life insurance.
But after Mr. A went outside the insurance company office, a meteorite from outer space came out of nowhere and squashed his whole body leaving him dead (the universe hates Mr. A). The insurance company quickly gave Mr A's family, the beneficiaries, the Php 300,000 insurance premium that they would get because of his death. Now if we're going to deduct that to all his financial responsibilities we'll have the following equation: 7,100,000 - 300,000 = 6,800,000. Mr. A's family is left with an astonishing amount of money to pay which really puts them in hardship.
A lot of people actually just get a life insurance without even knowing what should be the right premium for them which could be a problem for the bereaved family. In order for us to find the right premium in life insurance, we have a method here called the DIME Method. DIME is an acronym for Debt, Income, Mortgage, and Education. So kids, let's learn about the alphabet.
D is for Debt - now we don't want to burden our family with debt in case the unexpected happens so why not include that in your life insurance. If you have any pre-existing debts like credit card debts, salary loan, etc. better consider it in your premium.
I is for Income - say for example you earn Php 200,000 per annum. Now consider this: how will your family survive for 10 years without that income? What you do is multiply your annual salary by ten. So that would be like 200,000 x 10 = 2,000,000.
M is for mortgage - this basically includes any loans for that house you bought in a subdivision and expenses for building your dream house. If you have any PAG-IBIG housing loans include it in your premium.
E is for Education - if you have any children or even if you don't and 100% sure that you will have children and won't die forever alone, you should start preparing those expenses in college for the future. You need 1,000,000 pesos per child as an assumption for all the college expenses (tuition, books, allowance, room and board, transportation and that project of theirs called DOTA). Hey, if you're feeling like you want the best education for your children and decide to go for those high-end universities, you can increase that 1 million if you want. It'll help your family avoid those troublesome costs when your kids are in college.
In Mr. A's scenario, he needed 7,100,000 to pay for everything. So he should get the premium of that exact amount or more than that.
Here's another problem that he didn't even bother thinking about: What type of life insurance should he get?
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