I made a post about how financial services companies particularly life insurance companies have made strides in their marketing techniques. Sun Life actively using social media and even sponsored short-films.

Not to be outdone is Philamlife. I stumbled upon a promotional video of Philamlife and I was expecting the usual boring infomercial type of a video. It was a delight to see an MTV by no less than Bamboo singing a song about life and planning. Wow, this is a really good video and an awesome marketing campaign! Good job Philamlife… we want to see more!

Sun Life and Philamlife have paved the way to ‘out of the box’ marketing campaigns that will surely attract a lot of Filipinos who desperately need the benefits of life insurance. In my opinion, this is an awesome way to create awareness and I am so glad the 2 largest insurance have been bold in this arena — probably why they are the 2 largest insurers of the country.

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

Answer: My last column talked about determining first if you need life insurance and how much. I posted a table on life insurance analysis here. Assuming you have decided you needed a life insurance an.d you already have an idea how much coverage you need, the next question is what kind of life insurance should you buy and from whom should you buy it?

Generally speaking, there are two types of life insurance—term insurance and permanent insurance. Investopedia.com defines term insurance as “a type of life insurance policy that provides coverage for a certain period of time, or a specified ‘term.’ If the insured dies during the period specified in the policy and the policy is active—or in force—death benefits will be paid. Term insurance is initially much less expensive compared to permanent life insurance. Unlike most types of permanent insurance, term insurance has no cash value. It is the plain vanilla of life insurance; it is what we call pure insurance. Term insurance is recommended for those who want to maximize insurance protection while minimizing cost, as this type of insurance has the cheapest premium. It is interesting to note that less than 20 percent of term insurance policies are still in force when the insured dies and, therefore, never pay a claim. This product tends to be the least expensive insurance, initially. However, either the face amount decreases or the premium increases as the insured gets older. Term insurance provides death benefit protection only, has no cash value and not much versatility.

Permanent life insurance is “an umbrella term for life insurance plans that do not expire (unlike term life insurance) and combine death benefits with a savings component. The savings portion can build cash value—against which the policy owner can borrow funds, or in some instances, can be withdrawn to help meet future goals, such as paying for a child’s college education. The two main types of permanent life insurance are whole and universal life insurance policies, as per Investopedia.com. Whole life insurance is commonly referred to as ‘traditional life insurance.’ It is an insurance policy that matures at age 100 and has level paying premium, which means it does not go up unlike that for term insurance. You may opt to pay a whole life insurance until maturity or opt for shorter paying periods (at a higher premium).

Aside from death benefits, a whole life insurance policy also has cash value that can be withdrawn yearly or left to accumulate and earn interests. A whole life can also be a ‘participating’ plan, which can earn policy dividends. Policy dividends are allocated by an insurance company and dependent on the firm’s claims experience and investment returns. Most traditional life insurance plans will have a guaranteed cash value portion and a nonguaranteed portion (policy dividends).

Variable universal life or unit-linked life insurance differs from traditional universal life insurance because the underlying values can be invested, at the direction of the policy owners, in many sub-accounts—such as equity, fixed income and balanced account options. Policy owners are given the opportunity to direct their cash values based on their risk tolerance, investment objectives and personal asset allocation models. The policy owner assumes the risk in a variable policy, but has the potential for the highest return. Also, he can integrate the policy with his investment philosophy. Variable life insurance is typically recommended for longer-term needs, where cash accumulation, as well as death benefit protection, is a priority.

So which policy should you get and where should you get it from? I will answer that in Part 3 of this article due the limited space in this column. Catch it in two weeks.

Allow me to leave you with these words of wisdom regarding our fiscal responsibility to our loved ones—“But if anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever.” — 1 Timothy 5:8, ESV

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.