Saturday, March 28, 2015

How Much Life Insurance Do You Really Need?


It is beyond dispute that life insurance is important IF you actually need it. So when do you need life insurance? You'll need life insurance if you have dependents to protect and don't have enough savings or property that can be liquidated for their support in the event of your passing or incapacity to work. If you're single without anyone depending on you, then feel free to stop reading.

Now that you have determined that you need life insurance, the next question will be what type of life insurance will you get. I'm 99% sure that your insurance agent will push a VUL product on you because of its many benefits not only to you but, more importantly, to your agent (can you say a hefty commission?), but hold your ground and ask for a quote for term insurance as well in order to make an educated decision.

According to Forbes, if your main goal is estate planning then whole or universal life (of which VUL is a variant) is what you should get. But if you want to protect your family from the loss of your income, then term insurance is the way to go. Personally, I'm a big supporter of term insurance because I actually do practice "buy term and invest the difference", moreover I enjoy plotting and checking up on my investments (I'm a personal finance geek that way). But if you don't get your jollies from that or don't find it worth the effort to DIY your investments and, more importantly, you have more than enough cash to plunk down on VUL insurance, then go ahead and take out a VUL policy.

The tricky part is determining how much life insurance you should get. The rule of thumb is to get insurance that will be equivalent to 10x your annual salary because it is believed that this is how long it will take for a family to get over the financial loss of a provider (let's not even talk about the emotional loss). However, that's not really accurate because that figure doesn't take into account existing debts and education costs that may end up eating a huge chunk of the insurance proceeds. The more prudent way is to list down all of the immediate expenses that your family will be saddled with upon your death and also figure out what the monthly expenses are and then project these until the time your children can already fend for themselves.

Let's take the case of Brad and Angelina who have two kids, ages 4 and 2 years old. Brad is a brand manager who brings home a net of Php64,000 a month, while Angelina is a banker who clocks in a slightly lower income than her husband at Php60,600. They also have a side business that they're growing which nets them an average of Php10,000 a month, giving them a combined monthly income of Php134,600. Here's how their monthly expenses vis-a-vis their income looks:


If we follow the 10x the annual salary rule, Brad should be insured for Php7,680,000 (Php64,000 x 12 months x 10 years) while Angelina should seek coverage of Php7,272,000 (Php60,600 x 12 months x 10 years). But is that really enough? Let's dig deeper.

Their two young sons haven't started their formal education yet and have 17 years of education ahead of them (K to 12 and 4 years of college). For the boys' basic education (elementary and high school), Brad and Angelina want to send them to a private school near their house. The tuition fee in that school is Php80,000/year per student, and the full tuition fee rate for a student's entire stay there will be Php1,040,000 (Php80,000 x 13 years). Please take note that I no longer accounted for inflation in coming up with the present tuition fee rate of Php1,040,000 because the idea is to set aside the present value needed for tuition fee from the insurance proceeds.

College tuition fees at a private university can go to as high as Php150,000 per year and again if we take the present value for college costs, ignoring the effects of inflation, four years of college will cost Php600,000. Hence, to be able to ensure the entire education costs of one son, Brad and Angelina will need to set aside Php1,640,000.

Most housing loans are usually insured by Mortgage Redemption Insurance, which ensures that should the borrower die during the existence of the mortgage, the MRI will cover part or the totality of the remaining mortgage. Unfortunately, Brad and Angelina are co-borrowers on their mortgage, so the death of one will not extinguish the mortgage, leaving the surviving spouse with having to shoulder the mortgage, among the other household expenses, by himself/herself.

Assuming that Brad is the first to go, this is how his insurance proceeds might be spent:


The remaining Php4,140,000 now only represents 64.69 months or 5.39 years of his replaced income (Php4,140,000 / Php64,000), a far cry from the 10 year rule usually followed. You might say that 5.39 years of income is still nothing to scoff at, but the harsh reality is that when one spouse in a double income household dies, the remaining spouse will not be able to hit the ground running and function as he/she used to when his/her partner was still alive. The grieving period might be protracted to the point that his/her professional career is put on the line. And the impact of death becomes doubly catastrophic to the family when the sole breadwinner is the one who dies first.

Based on the discussion above, we now see that Brad needs an additional Php3,840,000 (Php64,000 x 60 months) to be added to the originally computed Php7,680,000 to be able to ensure that his family will continue enjoying his income 10 years after his death. So does this mean that he has to take out insurance coverage worth Php11,520,000 (Php7,680,000 + Php3,840,000)? Not necessarily.

If the couple has assets (i.e. real estate, savings, investments) that they can liquidate in the event of the demise of one spouse, then the value of that asset can be considered as a protection source together with the life insurance proceeds.

Let's say Brad and Jane have a resthouse in Batangas worth Php2,000,000. They are not attached to this resthouse and will not think twice about selling it if the need arises, so the total protection need of Php11,520,000 will now go down to Php9,520,000. Other assets that may also be liquidated for the upkeep of the family will likewise bring down the total protection need and lessen the amount of insurance coverage to be taken out.

To end this ridiculously lengthy post, I would like to emphasize once again how important life insurance is IF you happen to need it (i.e. you have dependents and/or you don't have enough sources of protection). So now excuse me because I need to hustle some more as I have once again realized how underinsured I am. Eeeep!


How Much Life Insurance Do You Really Need?


It is beyond dispute that life insurance is important IF you actually need it. So when do you need life insurance? You'll need life insurance if you have dependents to protect and don't have enough savings or property that can be liquidated for their support in the event of your passing or incapacity to work. If you're single without anyone depending on you, then feel free to stop reading.

Sunday, March 22, 2015

On Salary Delays and Shopping Triggers


I'm entering my fourth week in the Senate this week and I still can't believe that we're doing fine financially. To recap, it's SOP in government service to have a delay of about two months before a new employee can receive her salary. I actually have no idea why it takes that long because when I was in the private sector, I received my salary without delay. Maybe there's a lot more paperwork to accomplish in the government? I really don't know.

Anyway, this is exactly one of those times when having an emergency fund makes perfect sense and I'm so thankful that I managed to set aside about 2 months worth of expenses in savings and another 2 months worth in my VUL account (although I really hope I won't need to draw on that account). I also applied to monetize my leave credits from my last employer and am supposed to receive that within the next few weeks (crossing fingers). With the monetization of those leaves, I can even afford to replenish what I took out from my emergency funds and use the remainder of my leaves to tide us over until my paycheck comes in. 

There's a big probability that I'll be going through the same thing this time next year since my boss is serving her last term as a Senator and will be stepping down by 2016, and if I don't transfer to a new Senator I'll be a new employee again in another government agency and will be subjected to the two month salary delay again. Hence the need to build up our emergency funds again.

These past few weeks have been such an eye opener for me because the limited supply of funds has forced me to confront my spending triggers and bad habits, those being emotional and aspirational spending.

I tend to spend more when I'm happy, and I'm happiest when I'm spending for my loved ones. A quick review of my credit card bill showed that I tend to spend the most in Toy Kingdom more than any store. The usual story is that I would go to Toy Kingdom to buy a gift for an upcoming birthday party we're invited to, and I see something cute that I know my son or nephews will like and include that in my cart. The situation becomes worse when I have my son with me and he takes a liking to a toy and it's not really that expensive, so what's 200-300p more right?


It's also the same with eating out with friends and family. I get so happy spending time with them that I don't think twice about footing the bill, that is until my credit card statement comes it. Ulp.

As for aspirational spending, this is where the stack of books I have yet to read comes in. I buy books and picture myself in a coffee shop, leisurely going through my new book or leafing through the pages of a cookbook, diligently planning the following week's menu. But the truth is, I only get to read a few pages each week while I'm scarfing down my breakfast right before I get ready for work. And forget about having a weekly menu. At most, my husband or the yaya comes up with 3-4 viands that we eat and reheat throughout the week. I'm sadly just a domestic goddess wannabe.

Faced with my triggers, I now make an effort to think through my purchases and not let my emotions get the better of me. For example, I'm attending a wedding soon and since I know my wardrobe inside and out, I know that I really don't have anything appropriate to wear. But instead of picking up the first dress that looked good on me (price: Php2,000), I shopped around some more and came upon a rose printed sheath dress on sale for Php850.



It was a little loose along the sides but I knew that my trusty modista could easily bring in the excess fabric to make it fit. And paired with a blazer or cardigan, I could even wear it to work. Smart shopper alert!

It's honestly a constant struggle having to deal with my spending demons. Most of the time I can rein in my spending, but there are those days when I am plagued with shopper's remorse and find myself with another pair of cheap sandals or yet another striped top. But now instead of cursing myself, I treat each slip-up as a learning experience and move on, while taking the time to celebrate my own successes as well.

I wish I could end this post with some sort of fantastic anecdote but I don't have any. Like an addict, everyday I have to deal with my spending issues and sometimes the best way is to avoid my triggers altogether so that means minimizing mall trips, unsubscribing from shopping sites and creating goals that will divert my attention from accumulating more things. Whatever works.

On Salary Delays and Shopping Triggers


I'm entering my fourth week in the Senate this week and I still can't believe that we're doing fine financially. To recap, it's SOP in government service to have a delay of about two months before a new employee can receive her salary. I actually have no idea why it takes that long because when I was in the private sector, I received my salary without delay. Maybe there's a lot more paperwork to accomplish in the government? I really don't know.

Friday, March 13, 2015

Appealing to Emotions

I have this guilty pleasure of watching sappy short videos when that time of the month draws near. I actually don't realize it at the time that I'm watching these cry-fests, but then a few days later when the first gush happens (TMI!) and while I'm eating chips, I'll be like: "So that's why I was feeling so hormonal! D'oh!"

Anyway, if there's any shred of doubt left in your mind that personal finance is closely intertwined with emotions and that financial products prey on your natural desire to protect your loved ones, then these videos from insurance companies should set you straight stat. Be sure to have some Kleenex on hand! :)




After the tears, I promise that this next video will make you smile.



While the last video will speak to everyone out there who was lured by the mall's constant siren call of sales, promos, discounts etc. etc. 



I swear, the discounts kept on coming when we shopped in Hong Kong. After paying for our purchases, we would get another voucher for a 50% discount for purchases over x amount and then that would lead to another round of discounts. It was like they didn't want us to leave the mall at all.

That's why now I only go to the mall when I need to buy something because I know how susceptible I am to overspending if I go there without a battleplan. And that's also the reason why I unsubscribe to mailing lists and unfollow Instagram accounts when I feel the retail therapy itch bubbling up again or when regret sets in after yet another unplanned purchase online. I do believe that this is something that I'll be fighting against my whole life.

That gives me an idea for my next post, I'll write about the different techniques I practice to steer clear of the shopping sirens. Until then, enjoy your weekend!

Appealing to Emotions

I have this guilty pleasure of watching sappy short videos when that time of the month draws near. I actually don't realize it at the time that I'm watching these cry-fests, but then a few days later when the first gush happens (TMI!) and while I'm eating chips, I'll be like: "So that's why I was feeling so hormonal! D'oh!"

Anyway, if there's any shred of doubt left in your mind that personal finance is closely intertwined with emotions and that financial products prey on your natural desire to protect your loved ones, then these videos from insurance companies should set you straight stat. Be sure to have some Kleenex on hand! :)


Tuesday, March 10, 2015

My Saturday Habit


The BF Saturday Market opened four weeks ago and I've been there exactly four times. We really made an effort to be there for its Valentine's Day opening but somehow just found our way there in the last three weeks because of this and that. Not that I'm complaining though, because it's so refreshing to be out and about and tasting good food on a Saturday morning. Before we had to go to Alabang just to get our Saturday market fix on, but now we only have to motor a short distance to the BF park to sate our munchies. 

Aside from enjoying the festive atmosphere in the Saturday market, I also love checking out the homemade goodies and chatting up the entrepreneur behind the brand. You want inspiration? Then go to a similar market or bazaar and talk to the person manning the stall, there you'll find creativity, business acumen and passion all rolled in one. Or maybe you'll meet an expat trotting out his/her native cuisine or taste someone's lola's specialties. 

Two of the brands that I always make a beeline for without fail are Lokalitea and Stanley x Shaw Ginger Ale.


At 100p per cup or 200p a bottle, I drink the ginger ale ever so slowly, relishing every sip because it's so good but so mahalia as well! Lokalitea at 50p per bottle is kinder on my wallet but is every bit as refreshing.

For mains, I like the inasal and Vietnamese stalls best, although a noodle place also opened last week so that has pretty much shaken up my routine.

As you can probably tell by now, I tend to lose control when I visit the Saturday market and end up spending more than I should. It's the takaw tingin thing at work here, or maybe just plain katakawan? I have already tamed my shopping demon but I still have to work on curbing my food fair bad habit. Maybe instead of going every week, I'll just go every two weeks to keep my spending in check.

But for all the other Southerners out there, please go and check out our very own BF Saturday market, it's still not as well stocked as the Makati markets but hopefully in due time and with our support, we'll reach that level too.

See you at the market!

My Saturday Habit


The BF Saturday Market opened four weeks ago and I've been there exactly four times. We really made an effort to be there for its Valentine's Day opening but somehow just found our way there in the last three weeks because of this and that. Not that I'm complaining though, because it's so refreshing to be out and about and tasting good food on a Saturday morning. Before we had to go to Alabang just to get our Saturday market fix on, but now we only have to motor a short distance to the BF park to sate our munchies.