Question: What are the right criteria for choosing a good life insurance? – Jeremy Jessley Tan (@jeremyjessley) via Twitter

Answer:

Let me congratulate you first for your decision to consider life insurance. Although hugely important in personal financial planning, life insurance like many other financial instruments, aren’t really on the top of mind of many Filipinos. The percentage of our insured population is so low we are subjected to so much personal risk that will have a devastating effect to our lives.

I’m not sure if your query relates to life insurance programs or life insurance companies so let me just try to answer both.

Before buying life insurance, it is important to determine if you need one or not. If there are people dependent on your income like your spouse, children, parents or siblings, then chances are you really need one. On the other hand, if you are single and have no one who depend on your income – you probably would want to defer buying a life insurance policy until such a need arises. If you are considering buying a life insurance policy strictly as an investment, do consider other instruments that will suit such a need. Life insurance should be purchased because of the need to manage life’s risks, primarily against untimely death and serious physical breakdown (disability). Accumulation of life insurance fund values for investment purposes should only be a secondary reason – icing on the cake so to speak.

It is wise to first determine the amount of life insurance you need. A professional insurance adviser should be able to do an honest to goodness insurance needs analysis for you or better yet, make one for yourself. Here’s a simple way for you to determine the amount of insurance you need. On a sheet of paper (or excel sheet if you must), divide into two parts vertically. On the left side, put a heading and call it “Needs” and on the right call it“Sources”. Under the needs section, think of expenses that needs to be paid should you experience untimely death like hospitalization, burial costs, any outstanding obligation and about 3 months worth of expenses (label this as miscellaneous) – get the sub-total and label it as “immediate expense”. If you have any schooling children, it is best to determine education needs also as this will be a primary concern of those who you will leave behind. A simple way to do this is to get the estimated yearly educational and multiply it by the remaining number of years until they graduate. There’s no need to compute for the future value of education as we are merely allocation an educational fund that should be invested eventually. Label the sub-total as “educational expenses”. The 3^rd and final component of your “Needs” section is determining the living costs of your loved ones. Multiply your monthly need by 12 to get the annual expenses as it is easier to plan on an annual basis. Divide the annual amount by an estimated investment rate. The sum is a fund that can be invested to give perpetual interest payments to be used for living expenses.

On the right side of your sheet called “Sources”, try to think of all the sources that can generate funds should the need arises such as cash, investments, real estate and life insurance proceeds. It may not be a good idea to include your home as a source of cash as your family will need to keep the home.

Deduct the total sources from your total needs and the balance is an amount you should consider for additional life insurance. Note that life insurance is not your only option to narrow the gap between needs and sources but it is definitely the cheapest and fastest way to bridge the gap. Life insurance can also be a temporary solution as you build your other assets like cash, investments and real estate.

Below is a simple illustration on how a life insurance analysis may look:

Now that you know how much you need, the next thing you need to determine is what kind of life insurance you should get and from which life insurance company should you buy from. I will try to answer those in the next instalment of this column.

… to be continued.

Question: How do you invest wisely in an unstable market? What are the criteria that one should look for?—Rigel Kent Tugade (@rigeltugade) via Twitter

Answer: What you asked me is one loaded question. There are many ways to answer that question so let me take a shot at it. There really is no such thing as a stable market, in my opinion. Markets go through cycles or seasons. There are many things that affect market movements but largely, they are responding to the law of demand and supply. What investors should be wary about are wild fluctuations in the market environment and, unfortunately, that is what we are experiencing now.

Market movements, to a great degree, are about perceptions and fundamentals. People have a tendency to be severely optimistic or extremely pessimistic with their reactions which the markets reflect. Fundamentals of companies, business, economy and even politics affect markets in general. If business environment is good, companies are profitable, the economy is growing and there is political stability, expect the markets to respond positively and vice versa.

Severe movements in the market have both positive and negative impact. On a positive note, opportunities can be found with volatility for those who are risk takers. The downside of course is that capital loss can easily be experienced just as fast as profit can be made. The relationship of risk and return always comes into play whenever you invest. Yields will always be a function of the risk you are willing to take and as the cliché goes: High risk, high returns and low risk, low returns.

When investing, it is always prudent to know your investment objective, time frame and risk tolerance first and foremost. Investment instruments should be able to match the three I mentioned before considering parting with your hard-earned money. If your objective is long-term in nature, like retirement or college funding for your young children, then you may consider long-term instruments even if they can be volatile, like stocks, mutual funds and UITFs [Unit Investment Trust Funds], or even real estate. Although they are volatile, they are expected to grow over time—well, at least in theory. You may also want to practice cost averaging when you are investing in those instruments. You can invest regular amounts periodically, thereby averaging your investment cost. When market is low, your investment will allow you to buy more shares and vice versa—you will realize that you have gained from your investment over a long period of time. Cost averaging only works if you have a long-term perspective, say more than five years. I usually recommend monthly or quarterly investments over a long period of time because it is practical and it allows you to fully realize the benefits of cost averaging.

However, the best advice I can give you is to practice “diversification.” No one can predict what will happen in the future. While technical and fundamental analysis helps one discern, there really is no way we can be certain as to what will happen. It is best to diversify your portfolio among low- and high-risk instruments, as well as high liquid and low liquid investments. Having a severely low-risk portfolio means your money is not growing efficiently and is most likely growing at a rate slower than inflation. Over time, the value of your money diminishes as it loses purchasing power.

A very high-risk portfolio, however, can cause you many sleepless nights as fluctuations in the market can severely deplete your capital. As a financial planner, my recommendation has always been to strike a healthy balance and avoid extremes.

The good book even recommended diversification and here’s the proof: “But divide your investments among many places, for you do not know what risks might lie ahead.” (Ecclesiastes 11:2, NLT)

I hope this answers your question. By the way, the best thing you can do is also to invest in financial education.

* Appeared at the Philippine Daily Inquirer

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