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!


Izza Glino said…
Sobrang bago pa ko sa idea ng insurance pero as far as I'm concerned the earlier you invest in insurance, the better. Tama ba Ms. Jill?!
Jillsabs said…
Hi Izza,

Insurance and investment are two different things. Insurance is meant to replace your income to support your beneficiary(ies) in the event of your inability to work or death. While investments are vehicles that are meant to grow your money.

It is wrong to say that "the earlier you invest in insurance, the better" because that pertains to investments, i.e. the earlier you invest, the better. Time is your greatest ally in investing as it will give your money the chance to grow or let you recuperate from your loss.

I hope this helps!
edelweiza said…
Another insightful post, Jill! We have recently gotten a term insurance and I'm gonna blog about it soon. Term insurance because I'm also a believer of the saying, "buy term, invest the difference." We don't have dependents yet so we got one with a low coverage. We'll change it when the need presents itself.

P.S. Nabasa ko sa blog mo yung may critical illness benefit at umokey naman si hubby (mas sakitin kasi sya kesa sa akin) kaya ganung klase rin ang kinuha ko for us. Thank you for sharing all these valuable things, madami ka natutulungan alam mo ba yun. :)
grace said…
Thanks for this post mam jill, very helpful. Now I have a better idea about life insurances I guess I'll be looking for health insurance first since I am still single & I already have a BPI Philam na.
I am looking at the Medicare & Paramount Insurance today.

I think my brother needs a life insurance na since he already have a son, I was telling him to get a term insurance na but he doesn't know what is it & where to get it kaya I always look on ur post talaga.

ms. edel, aabangan ko rin yang post mo!
Jillsabs said…
Hi Edel!

I'm very glad to help and I'm happy you chose term insurance with CIB, if I could do it all over again, that's what I would choose too.
Jillsabs said…
You're welcome Grace! You should look into HMO coverage to supplement your health insurance as well. My husband was first covered by Maxicare but when I changed jobs, we could no longer afford the quarterly premium so I got him a Maxicare prepaid card for emergencies. It's our pantawid plan while I'm figuring out my new office's health benefits.

As for your brother, you're right that he needs life insurance. You're a good sister for looking out for him :)
Startup Mommy said…
I'm among those na na-salestalk sa VUL noong single pa ako. I really thought i was being responsible getting an insurance that time. Now that i'm a mommy na, i realized the true need to have insurance - ang question na lang is which insurance product to go with. Hayayayay.. itong computation on just how much insurance is very helpful.... Time to get another one. OMG.. wala pa sa kalingkingan nung tamang amount yung kinuha ko. ;) Thanks Jill for this post.
t0ni said…
diba creative writing ang inaral mo (undergrad and post)? ito lang pala yung makakapag pa math sayo. :D
Jillsabs said…
Korek! Favorite math ko yung may pera involved :p
Jillsabs said…
You're welcome Brenda!
Thanks so much for this post Jill. My experience with insurance agents so far is that when you ask for term insurance quote (as compared to the usual variable life insurance they are offering), they will say that your money will "go to waste" if the insured doesn't die, since you don't get a cash savings value at the end unlike in variable life. Of course, we know they get higher commissions if we get variable life compared to term insurance, so I don't know how objective that statement/observation is. Maybe do a post also on whole life/variable life vs. term insurance? :) If I decide to just go for term insurance for the lower premiums and invest the difference, masasayang ba the money I pay for term every year? What are the pros and cons, etc. Thanks Jill! :)
Jillsabs said…
Hi Judy,

I know several bloggers already wrote about VUL vs Term, here are my favorites from The Personal Finance Apprentice: and

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