What Type of Life Insurance Should You Get?

Now I'm going to be frank here and just blurt out that I don't drink coffee, I am an introvert, I read a lot of books and I think about what life would be like without Nutella.

http://www.ceschini.com.br/2013/05/no-nutella-for-you/

 Horrible! That's what it is.

Also, I'm on the side of getting a term life insurance rather than getting those life insurances with investments in them (I'm looking at you VUL and Whole Life). I just basically told you that I'm biased towards term insurance. What am I talking about dare you ask? Read more.

Now, of course, everything in  this world has an end and death is inevitable.

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"What's that you say? You have dreams? Hahaha! How Naive."

You see, the importance of a life insurance is for you to be secured that your family will get the financial support in case you cease on breathing. And my suggestion is that, you only get a life insurance for life insurance purposes and not investment, savings, or any other purposes. Why you ask? Read more.

Let's learn first the types of life insurance:

1) Whole Life Insurance - as the name implies, it will cover you for the rest of your life. And by rest of your life it means 100 years and below in life insurance language. BUT this will only come with little amount of premium and it is very expensive to pay in a given amount of years (Usually 10 years or 20 years). How expensive? Let's say you're 30 years old. Most insurance would put their price in that age around Php 60,000 (Note: prices depends on your age and the insurance company). And that's just for a premium of Php 500,000. If you total that 60,000 in, let's say 20 years you'll be paying Php 1,200,000 all in all. More than that measly premium of Php 500,000. But, of course, you'll get that Php 500,000 in case you die at any point in your life providing of course you don't go over 100 years old. It does, however gain cash value as years go by so it's not necessarily Php 500,000 but it'll take years for your cash value to exceed the premium and payment.

2) Variable Universal Life Insurance (VUL) - is insurance with an investment component on the side. The variable part of the name indicates the part of it which you, the contractor, can decide where to invest (usually in equity, bonds, balance, money market etc.). The universal part is the flexibility of the payment. Unlike Whole Life Insurance, there is no fixed date in paying. You can pay whenever you want in a year. It's considered a permanent life insurance because you'll get payed whenever death comes swinging his mighty scythe as long as their is sufficient cash value to pay for the cost of insurance which also means that there is no maturity age.

3) Term Life Insurance - is an insurance that pays you the premium in case death of the insurance holder happens within the given number of years. If the policy holder dies beyond the covered year, the holder will not get any money. You have to renew your term for you to be covered again. Compared to Whole Life and VUL, term life insurance typically has much greater premium coverage and not a pain in the wallet. Definitely recommended for the DIME Method.

(Note: there are many classifications of types of Insurance. This is just According to its Nature. To learn more go here.)

So why Term Insurance?

Because I and most well-known financial advisers (like Suze Orman and Dave Ramsey) believe in something called Buy Term, Invest the Difference (BTID).

Say for example you're 30 years old. Let's take a look at the match-up:

Whole Life vs Term

Whole Life

• You pay Php 60,000 more or less in 20 years with the total of 1,200,000 to pay
• Insurance Coverage: 500,000
• Maturity Age: 100
• By age of 65 you'll probably get 2,500,000 more or less as added cash value if you didn't claim any benefits and bonuses and assuming it has a 4% dividend.

Term

• You pay 3,500 every year for 10 years with the total of 35,000 to pay. (Price often increases every time you aged but it's only for like around 100 pesos so it's not really that big but let's just say it's fixed)
• Insurance Coverage: 1,000,000
• Maturity Age: May vary but let's just say in 10 years.
• By the end of the 10th year, the insurance company will not cover you in case something happens.

So how does Buy Term Invest the Difference come into place?

If we subtract the amount to pay of the Whole life insurance and the term insurance, we get a difference of 56,500. Now, if you decided to get a term insurance and invest the difference in a Mutual Fund (specifically a Bond Fund) for 10 years, you'll probably get more money than you can with a Whole Life Insurance. Take a look at this example:

You invested that 56,500 every year for 10 years with 4% interest per annum, by the age of 65 you'll probably get around 4,200,000.

Let's do meth:

Whole Life: 2,500,000 (Cash Value at the age of 65) - 1,200,000 (Total Payment) = 1,300,000 (What you get)

Term: 4,200,000 (Mutual Fund Investment Value by the age of 65) - 35,000 (Total Payment) - 565,000 (Total Invested) = 3,600,000

3,600,000 (Term) - 1,300,000 (Whole Life) = 2,300,000 is the discrepancy if you decided to take a Whole Life insurance. That's a lot of money you just potentially missed. You see now why you should get a Term Insurance.

In this example, the type of Mutual Funds I presented here is a Bond Fund which typically has an interest rate of 4-8%. The other types are Balance Fund (12%-16% but medium risk) and Equity Fund (18% or more but with a high risk). So instead of investing it in a bond fund and decided to invest it in an Equity Fund you'll probably get around  104 million by the age of 65. Isn't life wonderful if you know how to invest the right financial vehicle?

I'm not honestly the most believable person since you just went to some unpopular blog (but soon to be awesome and earning money) written by some unknown author (except for the ones that are close to me), so I'm going to post videos of people that have proven themselves to be good advisers when it comes to finances:

Suze Orman is a licensed insurance sales agent in 49 States in the US and she really considers any insurance agent who sells VUL or Whole Life an enemy.

 

Here's also a video (which apparently I can't show because Youtube) Where Suze talks against VUL

Here

Here's Best Selling Author Dave Ramsey talking about why you should buy Term Insurance:

  
                                    

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The DIME Method

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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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Five Types of Goal-Setters

The New Year is coming and you're probably writing down your New Year's Resolution. The popular ones that people usually write about are love, health and diet to make them feel better about themselves, kicking out of a bad habit (smoking, drinking, stealing someone's belongings, etc.), and money (or anything related to it). You want to achieve these goals for the next year and pray to God (or Xenu, if you're that weird Scientology dude/troll I've argued over the internet) that it would happen unlike the previous years (and also the previous year, and the year after that, and also the last year also after that) where it never came to much fruition. Seriously, though, what really is the point of a New Year's resolution?

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For the formality of knowing that you can plan and be miserable by the end of the year knowing that you can't achieve it?

But before we jot down those words, let's evaluate ourselves first if what type of goal-setter we are. Here are the five types of goal-setters:

1. Obstacle Finder

Ever heard anyone (especially yourself) say these lines: "I can't do it because [insert excuse here]", I'm not going to invest my money because the market might go down", "I have lack of knowledge in [insert lack of knowledge here]", I don't have enough [insert money or abstract noun here] so I can't [insert New Year's resolution here]". Chances are you're focusing more on the obstacle rather than the goal, which would result to stupor inactivity that would lead to you not fulfilling your New Year's resolution.

2. Complainer

These are the goal-setters that like to play the blame game. They usually say something like this: "I'm poor because of the government and I can't do anything about it", "Corrupt politicians are the ones making us poor people poorer" while the complainer sits idle all day drinking beer, "I blame it on my parents because I was born poor" and more annoying banters you probably here from the drunk tambays sitting on the wooden bench of the sari-sari store near you. Although I agree that there are some external factors and people that can cause you to be dissuaded in achieving your goals, it all boils down to the internal factor if you'll let all the negativity sink in to your head and making your goals unattainable. Don't listen to the devil inside your head. Fight it.

3. The Goal-Watcher

Us Filipinos really have this habit of commenting "I'm proud to be Filipino!" on websites after knowing one of our kababayans achieved success internationally in singing competitions, sports, and others. Now, I love my country, sing the national anthem as patriotic as possible in the shower, and happy for the success of our kababayans, but adoration and pride-leeching of the success of others to the point where you consider it as your own is, ummm... for the lack of better term and euphemism "pitiful?". Or maybe I should use pathetic? Hey, am I being offensive now? Okay maybe I should stop. The point here is that focus on achieving your own goals rather than others. Manny Pacquiao wins another fight and you feel giddily excited about it, but does that get you closer to your goals? You're just satisfied that your friend who has now a successful business (that was something you wrote in your New Year's resolution also) while you sit there in stupor silence. If your goals relate to that person who found success, then why not use it as a source of inspiration for you to act upon and not just be smiling creepily and be lazy about it.

4. Mr./Ms. Planner

Imagine yourself writing your goals for this 2015 in a sheet of paper. You put down "I'm going to be rich." So you educate yourself in real estate, stock market, and even Forex.You have all that knowledge but you can't do it because [insert reason here]. The problem here is that you have all the plans set out and the sufficient education for you to do it, but you just can't execute it. You're just in the level of planning (hence the name Mr./Ms. Planner if you didn't get it right away). To put it short: Education without Execution! If you change that "without" to "with", then you become (see below).

5. Mr./Ms. Clarity

When you're this type of goal-setter, then, no doubt you have educated and acted on achieving your goals. You have practiced Wisdom not knowledge. Your chances of achieving your goals is higher than those of the other types. You set out a goal of investing one hundred thousand pesos in a year, and you do your best even through the struggles and hardships.

Now, which goal-setter are you? And which goal-setter would you rather be?

Post is inspired by Series 2 of The Wealth Academy.

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Solutions for your Debt

I posted Causes for Heavy Debt, now I'm going to post a dog eating a cat.

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"Helps me human!"

Oh, and solutions for your debt.

1) Create your Budget and STRICTLY follow it - "Well, duh. This is so freaking obvious." It might be but some people still lack the sense that seems common to you, imaginary-character-that-I-just-made-up-in-my-head. Don't go all spending your money the moment your pay day comes. Manage your money first so you won't have any problems in the future. If you don't, there's a high chance you will borrow money from a friend or get a loan because of lack of management. May I suggest having a jar system.

2) Simplify Your Lifestyle - spend below your needs. If you can't save some money anymore, try eliminating those expenses that are considered wants. Yes, daily visitations to J. Co. or Starbucks is wants. If you have needs that affect your savings, better find a cheaper alternative. You can survive without buying a sack of Ganador rice. 

3) Pay Off High Interest Rates - if you have multiple loans and debts, I suggest you pay off the ones that take a high interest charge like credit card debt. The reason is because high interest debts (or any interests for that matter) compound over time which reallllllllllllyyyyyy is a pain in the butt if it increases.

4) Don't Pay the Minimum - Speaking of credit card debt (or any other debt with interest for that matter,) don't pay the minimum, pay as high as you can. You're just going to prolong your debt if you don't which, again, compounds. This avoids the compounding interest that is working against you.

5) Stop Bringing Big Cash - imagine yourself walking in SM and you have Php 10,000 fresh from your ATM. You saw something that catches your eyes and you have the tendency to buy that thing. You will start reasoning with yourself that "it's okay I can earn the money again." So you bought it. Then, you came across your favorite restaurant. That little voice in your head then tells you to "go eat, you have lots of cash anyway." What you are not realizing is that you just disrupted your budget (if you have a budget) and bought things that you didn't plan to buy. If you have a small amount of money in your pocket, you would think twice in buying stuff.

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Causes of Heavy Debt

A lot of people don't realize these symptoms that can cause heavy debt. Sometimes, they do realize it but they just don't know any other way for their finances. Let's check if you have some of the dreaded symptoms of Heavy Debtitis.

1) Spend More than They Earn - a lot of people have the lifestyle of the rich but the salary of the poor. Too much nightlife,

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Not pictured: Social Interaction

eating out all the time, money for their sugar daddy/mommy, and going on a trip without a definite budget are just a number of the many reasons why people fall into heavy debt.

2) No Emergency Fund - I have already talked about emergency fund before here and here so I won't elaborate further more. What I will elaborate is how people fall into the debt trap without this fund.

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It's also a good trap for bears

When emergencies happen, most people's solution is getting a loan, and this is an emergency so it's not really something you have prepared. So, of course, your budget gets disrupted (IF you have a budget to begin with).

3) Instant Gratification - you know that feeling after you got your paycheck for the month and you decide to buy something, like a camera, smartphone, or lots and lots of chocolate as a reward for your hard work and you forgot (or not even thinking) that you have a problem to face in the future like healthcare when you're old, or tuition for the kids in college, or a retirement fund. Yeah, this is what I mean.

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Can't really blame you on the chocolate part

4) In Search for Recognition and Fame - you know that friend whose always buying new stuff like that new laptop he/she always brings, five smartphones which he/she just only uses one, that expensive iPad that has all the not free apps (also including the blender app for his/her milk shake),

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It's for bringing all the boys in the yard.

always going out of town even if he/she has no money, buys everyone food, throws a party every week just so he/she could feel important in the crowd. Everyone drools at this guy/gal. He/She looks well off. What you're not seeing is the underlying horrible debt that they're facing.

5) Compounding Interest is Working Against You - let me give you a brief definition of compounding interest first (I don't want to mash you with a lot of jargon). Compounding interest is the interest added to the principal of a deposit, investment or loan so that the added interest also earns interest from then on. If you invest this will work WITH you. If, however, you will get a loan, not pay your credit card debt for a long time, then Compounding Interest is your ENEMY! I'll show you an illustration using the power of 72 invented by my dear old friend Albert Einstein which determines the year your money doubles (if working with you) or divides into half (if working against you).

The power of 72 

The Power = 72

The example interest rate per annum = 60%

Your sample money = Php 100,000

72 / 60  = 1.2 years is when your money becomes half

so Php 100,000 after 1.2 year = Php 50,000

Php 50,000 after another 1.2 year = Php 25,000

Another 1.2 year and you would probably give your money a eulogy.

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"I remembered the days when my money was 100,000, but debt took his life."

6) Believe Debt is the ONLY Solution - this is a problem with a lot people who aren't financially educated. Can't buy food for your family? Solution: UTANG! Son was hospitalized because of an accident? Solution: UTANG! Can't pay children's college tuition fee because of unpreparedness? Solution: UTANG! Electric Bills are overdue? Solution: UTANG! And then the heavy debts bury you 6 feet below the ground.

If you have these problems, I suggest you consult yourself first (no, not a financial adviser). I believe that the best financial adviser is YOU. Evaluate yourself first and avoid these problems.  I'll post Solutions in another post.

Post was inspired by Series 7 of Wealth Academy's Debt Management. A seminar for mindsetting people to avoid debt and solving debt.

Want to attend the seminar? Know first about the company here and my realizations here after I attended the first seminar.

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