Finally, a well produced honest to goodness personal finance TV in the Philippines gets launched. ABS-CBN’s news channel, ANC recently launched its personal finance themed show called On The Money with hosts Edric Mendoza, Melissa Gecolea and Salve Duplito.

The Registered Financial Planner Institute Philippines has partnered with ANC’s On The Money to help provide content with the purpose of advocating financial education for Filipinos.

Here’s an excerpt of my guesting at On The Money’s episode on Money and Self-Worth which was aired August 6, 2012.

Catch On The Money daily at the ANC.

Watch it HERE

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 much of my income should I save? How much of my savings should I allocate for retirement, education, emergency funds and other future costs?—Allan Magtoto, corporate employee via e-mail

Answer: There are no hard and fast rules when it comes to these things. Personal finance is very personal and concerns like these are relative and subjective. Ratios and formulas are broad gauges and theoretical in nature. A more thorough personal analysis is the best approach to answering your queries and a professional financial planner is the best person to answer your query. It will be in your best interest if you see one.

I can give you some suggestions that may provide some broad stroke answers to your questions.

In my talks and seminars, I often talk about the 70-30 rule at great lengths. It means that for every 100 percent of your net income, you limit your spending to 70 percent and save and invest the remaining 30 percent. In the past, we have heard about saving 10 percent of your income and you will be OK. I’ve done the math and 10 percent will simply not cut it. Considering inflation, accumulating just 10 percent of your income will not be enough for the many life events that you will need to prepare for financially. However, 10 percent is indeed a good start especially for those who are having a difficulty setting aside money on a regular basis. As you get a better handle on your finances and as your income goes up over time, increase the percentage allocated for your savings and investments until it reaches the ideal rate of 30 percent. For the younger ones with no dependents yet, a higher percentage of savings will be a great idea and will allow them to get a much-needed head start in an uncertain future. The 30-percent savings can be used for the many events that we need to plan for.

For emergency funds, allocating three to six months’ worth of your expenses would be a great hedge against whatever emergencies you may have to deal with, including sickness or loss of employment. Many of us do not have emergency funds, which is unwise. I recommend you start with building your emergency funds first before tackling the other concerns. Once you have done this, then you are ready to start preparing for your other life events.

As to education, it is best if you can compute estimates of the escalation of tuition costs and match those with appropriate investment planning, which a professional financial planner should be able to help you with. Again, and for the interest of this column, I would give you a ratio that can be a good broad rule: allocate 10 percent of your income for future educational needs of your children. Savings for education should be invested properly so that the growth of the funds will overtake the rising cost of education. You may want to do regular investing for the next 10 to 15 years of the child, which should be able to cover future education costs. Pooled funds like UITF or mutual funds might be a good choice as an investment instrument, among others. If the funds exceed the actual educational costs of your children, you may want to divert the excess to other needs like retirement funding.

For retirement, 10 percent of your income is also a good theoretical ratio. Retirement, like most things in life is relative. If you plan to have a very comfortable and luxurious retirement, then it will take you more than just 10 percent of your income. However, a decent retirement should be able to be achieved with regular retirement investing for at least 20 years. Retirement is a long-term need so it is best financed by long-term investments like real estate, stocks, mutual funds, UITF and business ventures. The longer you prepare for retirement, the better it will be for you to grow your capital. Long-term investments will allow you to wait out the volatility of the investment environment. As a general rule, investments, though fluctuating, should go up over time.

Another 10 percent of your income can be for a general savings fund, which you can use for other plans like equity for your home, family vacations, seed for business capital. Just make sure that you invest your savings properly and you understand the relationship of risks and returns.

Let me reiterate that what I wrote here are merely broad stroke allocations and should only be followed as a general rule. We all have individual needs and preferences; therefore, we should have individual planning. Certain financial requirements may take precedence over others—a home might be a priority over retirement during the earlier periods of your life.

This column appeared at the Philippine Daily Inquirer.