Financial IQ: How much should we save?

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Financial IQ Philippines Quick Hit(s):

Savings is a habit.  Once it becomes a habit, increase the amount of savings as you go.


How much money should a new credit card user save?


Your columns about money issues are thought-provoking. I’m a new credit card user and it’s so much fun to be able to spend even before my salary comes. I often also just pay the minimum required plus the interest. In your columns, you keep advising that saving money should be promoted in the Philippines. Can you quantify that with specifics like how much savings we should aim for in order to be safe?


On life insurance, I am still very young. Who should be my beneficiary and can I change that to my future kids when I eventually get married?


Nathaniel K. Velasco, 27 years old, Dumaguete City


Answer


Thank you for your interest in insurance, Nathaniel.  Being young should not deter you from acquiring life insurance; in fact, it should be an advantage because of the much lower premiums for younger ages.  In my particular case, I realized the necessity and beauty of life insurance in my early 20s when I first started working.  At that time my income was not enough to acquire properties or other material assets, so I decided to prioritize savings and insurance coverage.


Even if I wasn’t married then, my principal reasons for getting life insurance were (1) to preserve my financial independence (for example, if I get hospitalized I would have money to pay my medical costs and not have to rely on my parents to finance me), (2) to strengthen my desire to set aside money for the future — my bank savings account represented my liquidity savings while my insurance policies represented my forced savings, (3) to begin accumulating wealth by acquiring an asset I could afford — life insurance, and (4) in case something fatal would happen to me I could contribute to the future welfare of my parents or siblings.


The last reason also answers your question — you can initially designate your parents or siblings as your revocable beneficiaries and later make a beneficiary change to your fiancée, wife or children, which life insurance companies allow, when the appropriate time comes.

http://www.philstar.com/Article.aspx?articleId=632156&publicationSubCategoryId=82

Financial IQ: Why save money instead of enjoying life?

Financial IQ Philippines Quick Hit(s):

It is called planning for the future... :)


Why save money instead of enjoying life?


Why should we save so much money? Isn’t it better that we enjoy our lives since life is short and let the future generations work for their own money? We have a saying: hindi mo madadala yung pera after death di ba? Life insurance is also good for emergencies or tragedies, but if a family has more than enough to tide them over, maybe life insurance is not a necessity for some families?


Daphne Figueroa, 23 years old, call center agent, Quezon City


Answer


Daphne, there are many views to life and one such view is “to eat, drink and be merry.”  I agree with you that life should be enjoyed and it is precisely for this reason why I believe you need to secure it with life insurance.  Life is full of uncertainties and we are exposed to real risks every day.  These risks come in the form of accidents that may leave debilitating effects on our lives; or the risk of dying too soon, well before we set our children off in life or maybe the risk of outliving our fortunes in our old age. 


If we do not neutralize these risks, we may not enjoy life at all.  Through life insurance, we can “transfer” these risks to financially sound institutions that, for a fraction of the cost, will be willing to mitigate a portion of the risk we may be exposed to.   This being said, it does not matter therefore if you are financially well off or not — we face the same uncertainties and risks.  In fact, when someone has more to protect, there is more reason to secure it with insurance. 

http://www.philstar.com/Article.aspx?articleId=632156&publicationSubCategoryId=82

Financial IQ: How to save money with high cost of living?

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Financial IQ Philippines Quick Hit(s):

We just need to shift our money management ways.  We need to set aside a fix savings amount per period regardless of our projected expenses.


How do you save money with the high cost of living?


Your columns on personal money questions are relevant and interesting, especially your advocacy for people to save money. I agree with you about saving money, but it is easier said than done in our society where the costs of living are so high like electricity, transportation, food costs, housing, education, medical and others. I think even life insurance is more costly here than in other countries, because my sister in New York told me that their life insurance there is cheaper. Why? How can we save?


Patricia J. Pastrana, 32 years old, businesswoman, Makati City


Answer


During one annual employee recognition program of my former company, I will never forget what one of our co-workers said when she spoke on behalf of the awardees.  She was receiving a salary just above minimum wage, but she told everyone that no matter how little one earns, one can still make ends meet.  I take inspiration from her words because while it is true that today’s higher living expenses pose an even greater challenge to saving money, we can still set aside part of what we earn if we are determined enough to do so. 


We can exercise our power of choice to decide on what we truly need to spend for.  Moreover, the other side of this higher-cost-of-living reality is that businesses compete more fiercely for a share of our income and this often results in their offering discounts and promos to lessen the cost of their products/services (like budget airfares, for example).  In order to save more effectively, make a paradigm shift. 


Most Filipinos spend first, then save what is left of their salary before the next payday.  This does not work most of the time.  What does work is to save first, then spend what is left.  For example, if you regularly deduct 10 percent  or more from your salary each time you are paid and immediately put it into your savings account, you will eventually develop the discipline of prioritizing your savings before any expense as well as adjust your spending habits to make the remaining 90 percent of your income fit your needs.  My wife does this for our house help, and you will be amazed at how much they have been able to save!


As for life insurance in the Philippines costing more than in other countries, if indeed it is so, it would be because (1) the more developed countries have a greater percentage of their population insured and can thus spread the cost of insurance to more people, (2) the tax treatment in other countries is much lighter for life insurance policies and this leads to lower premiums, (3) quality of life insofar as health services and overall safety standards is better, which then promotes longevity and lowers risk-management costs, and (4) stronger insurance penetration leads to a greater variety of insurance products available, which cater to a wide range of affordability.  As our country’s economy improves and more Filipinos are enlightened about insuring themselves, we are confident we can eventually achieve parity with these nations, but don’t let it stop you from insuring locally today.  

http://www.philstar.com/Article.aspx?articleId=632156&publicationSubCategoryId=82

Financial IQ: On investing by ourselves...

Financial IQ Philippines Quick Hit(s):

In order to rely on ourselves in investing, we need to learn the basics of that investment instrument.


Is it better to invest money ourselves or rely on hedge funds, etc.?


Many of us in Cebu read your column and Philippine STAR. My question: is it better that we personally study and invest our money, or should we rely on hedge funds or other entities to invest our money even if we don’t know about them? On insurance, my family is a victim of CAP; we lost money on two pre-need education plans we bought. What happened to this case? I believe in your advocacy of promoting life insurance with Insular Life and Philippine STAR, because our father died in 2001 of a heart attack at 60 years old, and the life insurance money we got helped our mother with funeral expenses and expanding our family businesses. 


Catherine Salimbangon, 26 years old, married, president of Organique Acai Drink, Cebu City


Answer


There is a certain minimum level of understanding that is required from investors in order to minimize the possibility of placing hard-earned money into questionable investment outlets. Basic finance concepts like the correlation of risk and rewards, time value of money and how investment returns are derived should be part and parcel of the decision making process whenever we consider making an investment. After we have satisfied the standards we have set for ourselves in terms of expected returns and the risk we are comfortable to assume, we can then pass on the implementation on these objectives to professional money managers or by choosing appropriate products/services provided by financial institutions.

http://www.philstar.com/Article.aspx?articleId=630091&publicationSubCategoryId=82

Financial IQ: Reliability of life insurance?

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Financial IQ Philippines Quick Hit(s):

Yes, life insurance from major life insurance companies is very reliable.


Is life insurance still reliable after the troubles of AIG, CAP & PACIFIC plans?


I’ve been offered life insurance, but I feel it’s no longer reliable. I feel that depositing my savings in the banks might be safer due to the government’s PDIC guarantee. I read about AIG in the US having troubles a couple of years ago, and local firms like CAP and Pacific Plans. I want to also ask if the many victims of CAP, Pacific Plans, etc., can ever get justice or their money back?


Atty. Floro Q. Casas, 31 years old, married, Placer, Masbate


Answer


The problems CAP and Pacific faced are not related to the life insurance industry. Both had problems with their pre-need companies, which sold open-ended pre-need education plans. Open-ended pre-need education plans are securities that guaranteed the college education of a child regardless of the cost of education. This model worked during the time when tuition fee increases were regulated by the Dept of Education. However, when tuition fee increases were allowed to operate under free-market pricing (meaning, schools can increase their tuition fees at rates which their target market is willing to pay), CAP and Pacific found themselves holding on to contracts that provided guarantees difficult to estimate.


As for AIG, their troubles are rooted in their non-traditional investment division, which provided guarantees to sub-prime assets. Their life insurance operations per se were not problematic. However, since both belong to the AIG conglomerate, the insurance operation was likewise affected.


Allow me now to tackle the most important issue you raised: the reliability of insurance. The concept of insurance is all about risk protection, management thereof and eventual transfer of that risk to mitigate the potential effect on your person. If you choose not to secure an insurance cover, you choose to absorb the full effect of the risks you are exposed to. Such risks could involve dying too soon, dying too late, loss of economic value due to disability or poor health, loss of income due to accidents, etc. Insurance companies provide the means for the transfer of such risks from an individual/organization to an insurance company, which is in a financial position to absorb the impact of said risks. In other words, you get insurance so an institution with more financial capability than yourself can share or absorb the risks you are exposed to.   Insurance companies continue to be reliable. Even in the aftermath of several financial crises, the latest of which was the sub-prime, these insurance companies continue to operate and fulfill their contractual obligations.


Should you or should you not transfer risk? I believe it makes sense for anyone to do so since most of the risks we are exposed to are real. The key is to choose the insurance company you will entrust your hard-earned money to. 

http://www.philstar.com/Article.aspx?articleId=630091&publicationSubCategoryId=82

Financial IQ: Life versus Car insurance?

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Financial IQ Philippines Quick Hit(s):

I agree.  Life insurance is much more important than car insurance.


Why not insure our lives, Since we all insure our cars?


I support your advocacy of promoting life insurance awareness in the Philippines, because we should ask: Are you and your life less valuable than a car, since by law you are required to insure your car with third-party liability? Why do most people not buy life insurance when the repercussions of death are so much more than that of the losses in a car? My elder brother died in 1997 at only 43 years old and he had life insurance, so it was good for his family because he was also a believer in the importance of life insurance. I suggest people learn how to manage their wants and priorities; are our expenses necessities or not? Life insurance is a necessity for all. Come to think of it, an iPad can pay for one year’s life insurance premium for a young person under 30 years old.


Johnlu Koa, 52 years old, married, founder & CEO of French Baker, Inc., Mandaluyong City


Answer


Mr. Koa, thank you so much for supporting our advocacy of financial preparedness and security through life insurance. You have correctly pointed out yet another of life’s ironies: our lives are more valuable than any of our material possessions but we would rather insure the worth of our cars and houses than ourselves. Yet it is our ability to create/earn income for our loved ones that enables us to acquire all our worldly goods. 


In my many years in the life insurance industry I have come to the conclusion that the principal reason why many Filipinos are still not insured is because they have not been properly educated on the meaning and importance of financial risk management. I believe this is why many of them don’t see the value of life insurance. The most common misconception is that life insurance is a needless or even unaffordable expense. This is simply not true! 


First, it is not an expense but a financial instrument that accumulates money through the years wherein it inevitably comes back to the insured or his family in an amount greater than what has been put in, and if time runs out before the intended financial goal (represented by the sum insured or face amount of the policy) is attained, the insurance company will complete the balance (which no other financial institution can do). Second, there are so many life insurance products today that are quite inexpensive. It only takes less than what a person would spend monthly for his cellphone load to have some amount of life insurance coverage. 


You are entirely correct in saying that it is a matter of managing one’s wants and priorities, and this is precisely the mission that Insular Life is determined to play a major role in pursuing  to make more Filipino income earners understand and appreciate how to balance their financial activities with the right priorities on expenses, savings and investments while effectively managing the risks and uncertainties of life through insurance.   

http://www.philstar.com/Article.aspx?articleId=630091&publicationSubCategoryId=82

Financial IQ: Insurance for mistress?

Financial IQ Philippines Quick Hit(s):

Anyone can be insured (unless there are uninsurable health related issues)... as long as insuring company is not aware. :)


Can Mistresses, Jueteng lords, Politicos & Smugglers be insured?


In past columns you’ve tackled why mistresses cannot be life insurance beneficiaries, but can they be insured with their boyfriend as payer? What about people in illegal professions like jueteng lords or smugglers, can they buy life insurance, too? Is it true that politicians also cannot get life insurance? Can you ask Insular Life to give us a list of various professions that they do not like to insure and why?


Valerie Roberto, 28 years old, Parañaque City


Answer


I believe that, just like other people, mistresses can be allowed to secure life insurance for themselves subject only to the risk evaluation and underwriting requirements of the life insurance companies. Their health, occupation, lifestyle and other particular circumstances will be major factors in the assessment of risk, if any.   For that matter, politicians may be insured also, as in fact many of them are, but again subject to the same risk evaluation and underwriting requirements. On the other hand, life insurance applications from persons engaged in illegal activities like jueteng lords and smugglers will most likely be declined on account of the higher risk of their activities. 

Due to the varying risks brought about by different individual circumstances, we cannot provide you with a list of professions or activities that are insurable or not insurable. Each of these is individually evaluated and cases not considered standard may still be covered subject only to applicable underwriting ratings or other conditions commensurate to the risk involved. Of course, those applications from persons who are really exposed to unacceptable risks are either deferred or declined as may be applicable.


In relation to your first question, you were also asking if mistresses can be insured with their boyfriend as payer or policyholder. In reply, I think that generally, no insurance policies are issued in cases where there is only a “boyfriend-girlfriend” relationship between the insurance applicant and the proposed insured, unless the presence of “insurable interest” can be established on the part of the boyfriend on the life of the said mistress.   This means that we have to find out if, in the existing relationship of the parties, there is reasonable expectation that the boyfriend will derive pecuniary or financial benefit or advantage on the continuance of the life of the mistress or if the said boyfriend would suffer pecuniary or financial loss or damage on account of her death or injury. The interest must therefore be in favor of the continued life of the proposed insured and not in its loss or destruction. Otherwise, any insurance that may be issued in the absence of such “insurable interest” would render that insurance void since it would constitute as wagering on the life of the proposed insured. The Insurance Code, in its Section 10, enumerates the situations where there is insurable interest that would allow insurance coverage, as follows:


“Section 10. Every person has insurable interest in the life and health:


1) Of himself, of his spouse and his children;


2) Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;


3) Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and


4) Of any person upon whose life any estate or interest vested in him depends.”

http://www.philstar.com/Article.aspx?articleId=630091&publicationSubCategoryId=82

Financial IQ: Too much life insurance?

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Financial IQ Philippines Quick Hit(s):

Life insurance's primary objective is to cover unexpected loss of earnings due to untimely loss of a family member(s).  Wealth protection is another excellent feature but not the primary goal.


Why buy lots of life insurance when It’S better not to spoil kids with too much money?


Thanks for your interesting columns and very pragmatic insights on so many diverse topics. On life insurance, my hesitance in buying too much of it is my idea that maybe it’s not good to bequeath too much material wealth on our kids so that they won’t be too comfortable or have too much and become weak in character. A lot of rich kids are weak in character. I am a self-made entrepreneur; my parents died when I was young and I grew up with my uncle. I had to earn every centavo through hard work, so I don’t want my kids to have too much. Why buy lots of life insurance? Even the world’s richest investor, Warren Buffett, believes it’s not good to leave too much wealth to kids, isn’t this correct?  


Jefferson Allan Tiu Chan, Quezon City, 48 years old, businessman


Answer


Thank you for your question, Mr. Chan. As a parent I totally agree with you that our children must learn to provide for themselves; to become self-sufficient in life. This objective does not have to be in conflict with obtaining life insurance for their welfare and protection. 


As parents we also care deeply for the future of our children, so it’s just a matter of balancing these two goals.   You decide how much life insurance coverage is appropriate for your family. Insurance is primarily sought to provide a family with continuing income after a breadwinner’s death, but that income doesn’t have to be perpetual. You can opt to acquire enough insurance to provide your family with income only for a certain number of years. This is not intended to enrich your children or even for any money to be given directly to them. 


For instance, if your family needs P50,000 monthly for its normal expenses, and you think they will need one or two years to adjust to your loss, then you can just secure approximately P1.2 million in life insurance coverage (less than the value of many new cars) that will be completely consumed in two years, by which time they are expected to fend for themselves. This would hardly be considered spoiling or pampering your children. 


Life insurance is not only used to create wealth, but to preserve as well as transfer it. Leaving behind life insurance to pay for estate taxes enables your family to inherit your assets without any loss of value. The only thing you would not want to do, based on your comments, would be to have life insurance add more wealth for your children.  

http://www.philstar.com/Article.aspx?articleId=627946&publicationSubCategoryId=82

Related articles

• Have life insurance? Is it enough or maybe too much? (usatoday.com)

Financial IQ: Health of Philippines Life Insurance companies

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Financial IQ Philippines Quick Hit(s):

The strong ones are even getting bigger. :)


How are philippine life insurers doing, especially in light of pre-need scandals?


I always enjoy reading your columns. How are Philippine life insurance companies doing now, are they doing well? In recent years, due to the pre-need scandals, I almost withdrew some of my existing life insurance policies like that with Prudential Life, but didn’t.  


Rene S. Tayag, seafood processing entrepreneur, 37 years old, owner of TGL Food Group in Clark Freeport


Answer


In general, the Philippine life industry is still quite healthy despite all the ongoing financial turmoil. The general good health of the life industry can be attributed to the prudent management of the life companies, as well as the strict regulation by the Insurance Commission. For instance, the IC requires prior approval of all insurance products as well as investments of the life company outside of bank deposits and government securities. The IC actuaries test all new products to ensure that the product features conform to acceptable standards and assumptions. 


In 2007, the Department of Finance issued Department Order 27-06 that requires a capital buildup to P500 million and P1 billion for 100-percent-Filipino and 100-percent-foreign-owned life companies, respectively, by 2011. Subsequently, the IC introduced the Risk-Based Capital (RBC) adequacy ratio baselines, similar to the capital adequacy ratio required of the banks. This RBC requirement is over and above the existing minimum solvency requirement. 


Like in most businesses, the 80-20 Pareto Principle also applies to the life insurance industry. The top 20 percent life companies, which includes third largest Insular Life, accounts for 80 percent of the total industry premium income. Insular Life has high marks in solvency with total assets and capital of P60 billion and P15 billion, respectively, liquidity with cash and near cash of over P1.6 billion and profitability with net income at P2.2 billion in 2007.  

http://www.philstar.com/Article.aspx?articleId=627946&publicationSubCategoryId=82

Financial IQ: Insurance for employees?

Financial IQ Philippines Quick Hit(s):

Term life insurance fits this perfectly (which resembles car insurance).


Ensuring the welfare of contractual employees - Due to the labor laws of the Philippines, it is unfortunate that many entrepreneurs just hire contractual workers and employees, but still I sincerely want to give my employees better benefits. Does Insular Life offer any life insurance product that I can use to protect the lives of my contractual employees during the half-year that they’re working for me? Is there such a policy? What are the costs and how much are the benefits for employees? What about accident insurance? I think your columns should forcefully advocate reforms in our labor laws so they’re better for investors, the Philippine economy and all workers. More power.


Benjamin Sy Ong, 43 years old, businessman, Makati City


Answer


Thank you, Mr. Ong, for being deeply concerned about your workers’ welfare. Employer-purchased insurance benefits are usually group life and/or health insurance contracts of which Insular Life has a thorough portfolio to choose from, and we can even offer HMO plans through our subsidiary, Insular Health Care. 


As a general rule, coverage is for one year and renewable thereafter. There have been some instances in the past, however, when business owners have requested that their contract or project-based workers also be included even if their services might be for less than a year. In such cases, we extend coverage for the duration of such workers’ stay, even if for a fraction of a year. Premiums are charged accordingly. However, such exceptional considerations are first referred to our actuarial department for proper evaluation and costing because short-term contractual personnel will have an impact on the overall risk assessment of the entire organization. It may be possible to cover them depending on the results of the said evaluation. 


As for the actual cost and benefit levels, these can only be determined after knowing your specific requirements, business conditions, age and health profiles of your company’s workforce. This is best handled if you will allow one of our account executives to meet with you in order to secure the needed information for a quotation. 


Finally, on your query regarding accident insurance, there are some types of accident insurance products designed to take on short-term risks, and we likewise have this. Accident insurance is quite inexpensive because it is limited only to accidental causes. At the same time, certain avocations or occupations are excluded. Once again, the best way to determine if this will suit your purposes would be to sit down with you on this matter. Assuming, however, that your contractual workers are eligible, why not consider gifting them with a one-year accident insurance coverage if it will only cost a couple of hundred pesos or less?  

http://www.philstar.com/Article.aspx?articleId=627946&publicationSubCategoryId=82

Related articles

• Types of Life Insurance Products (termlifeinsurance.org)

Financial IQ: How to raise a future Gokongwei?

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Financial IQ Philippines Quick Hit(s):

Interesting take... :)


What do former US President Bill Clinton, world conqueror Genghis Khan, ancient China’s Song Dynasty hero General Yue Fei, and self-made taipans Li Ka-Shing, John Gokongwei Jr., National Book Store chain founder Socorro C. Ramos and Zest-O juice/Zest Air boss Alfredo “Fred” Yao have in common? They are all successful, they were all kids when their fathers died early and they were not spoiled children.


At the recent wake of Fred Yao’s 89-year-old mother in Quezon City, with numerous guests visiting to condole, such as President Noynoy C. Aquino and ex-President Gloria Macapagal Arroyo (both went on different dates), the Philippine “Juice King” said that he was only 12 years old when his father died. For him, ever since he was a kid, he said, “Hard work was not an option or a choice. For me, coming from a humble family background, it was a matter of survival. There was a need to persevere, to overcome and to succeed.”


Not a few successful business people ask me how they can train their kids to be hardworking, driven and gutsy, and not fall by the wayside as disobedient, spoiled or effete kids with self-indulgent lifestyles. Not a few people worldwide have achieved success in their lifetimes, but tragically failed in the upbringing of their children and heirs.


Research shows that among the ways to ensure that kids grow up to be good men and women are never spoiling them, instilling discipline and obedience, and providing a solid education. Crises or childhood hardships also strengthen kids’ character and their drive to excel.

http://www.philstar.com/Article.aspx?articleId=627946&publicationSubCategoryId=82