Insurance Protection or Investment?

Last night I received a PM, asking why I switch between Insurance and Investment in my posts. The lady has no insurance policy and “invests” money in the bank. I cannot tell if she is a non-believer of life insurance but the way the followup questions were made, seems like it.
There are two aspects: becoming protected and of course enjoying a wonderful retired life.
 
Protection Insurance policy protects the insured (living benefits) and in the worst case of suddenly taken out of the picture, protects those left behind (read: FAMILY), called death benefits. It essentially provides a guaranteed wealth, in Millions. If one dies after two years, he/she would have saved only thousands, yet, as a death benefit, the beneficiaries will get that huge amount, parting gift so that in the next few years, their lives will not totally hit rock bottom. As a living benefit, imagine you get stroke or heart attack or cancer in the next two years, that same protection will advance a portion (and it’s again in Million term) for you to use in whatever way: medical expense? money in lieu of salary? etc.
 
Protection is number one because investments, savings and all may be put at risk and may get drained easily if you are out of work due to Permanent Disability or if diagnosed of a critical illness. It will be costly. You want to make sure that before your “buffer” get’s drained, there is something not from your pocket to help you out initially. 1 Million to spare? who gives that?!
 
I also post stuff about investments, which by the way, has been my personal crusade for the longest time. In whatever way I can, I hope to contribute to make people become financially independent, financially literate, and debt-free (I was a 3-year prisoner of credit card debts 2000-2003, since then I don’t own a credit card!). I have persuaded more than 30 people to get into the stock market and invest (some would really trade, like me, lol).
 
Investments are meant for people who already have protection policy, those who are already guaranteed sufficient MILLIONS to protect self and/or family. Because we invest with the goal of taking that European tour, or buying that nice house by the beach or that dream car right? We invest with a purpose. We should! because if there’s no end in sight or motivation to invest, it simply won’t work. We will not be motivated to have a disciplined investment scheme without a goal at the end. “Begin with the end in mind”.
 
If you can reach millions earlier by getting 10% avg annual returns, why settle for decades at 1% less 20% withholding tax less inflation effects by saving in the bank? Rule of 72. if annual growth rate is 10%, then if you invest 100K today, it will be 200K in 7.2 years, if 10% is consistent. So how much should you invest today if a European tour for 4 may cost 500K? When are you taking that tour?
 
So it’s really either the post is for you because you aren’t protected or the investment post is for you or both will impact you. 🙂

Protection Cost

“Insurance cost is cheaper when you are not yet sick or are still able to work.”

Insurance is really wealth created from the moment an Insurance Policy is issued, in fact partial insurance coverage of 500,00 is already enforced at the time the Provisionary Receipt is issued once payment has been made.

You can sleep with ease and comfort knowing that whatever happens to you, your loved ones will be well taken cared of. Who else can give them Millions for their future if you are no longer there to assist? Even while alive, do you really have a few millions to use or for them to use? May be not!

And God willing that you will still be there at the ripe age of 70 with your dependents already having a comfortable life of their own, will what you save for the insurance be put to waste? Certainly not! The Variable Universal Life (VUL) insurance is specifically designed so that what you invested for protection can become a source of retirement too! Imagine being able to withdraw a few millions because you wanted to buy for your 6-months worth of medicine and things you may need at that time while still insured until the age if 100? If you are still alive when you retire at age 65, you have potentially 4.2 milion to withdraw from!

At a cost of 3,000 per month or 36,000 a year what is in it for you? 

Say you are 30 years old, 

PROTECTION Benefits:

 (@10% growth rate, Fund Value is not guaranteed as it will depend on the performance of the chosen fund)

Insured Amount/Sum Assured: 3Million

In case of total & permanent disability: 2M

Accidental Death or Disablement: 500K up

If diagnosed with Critical Illness: 800K up

Fund Value if you die @ age 65:  4.2M

Total Benefits: 7M up!!

Whoever is your beneficiary will surely be well taken cared of and that’s really the essence of protection.

If you become totally disabled at age 35 and you can no longer work, what is not nice and wonderful about being paid 2M in advance from your 3M Sum Assured so that you can still provide for your family? added to that, since you provided a Waiver on Total and Permanent Disability rider, you continue to be protected with 1M Sum Assured and will NO LONGER be paying your 3,000 a month or 36,000 per year because Pru Life U.K. will continue paying that for you until age when the waiver shall lapse at age 70. since at age 70 you will have 10M or more, the fund value will take care of the payments until age 100, more than enough to cover your protection insurance.

If you are diagnosed with any of the 36 Critical Illnesses which include stroke, heart attack, cancer, etc. – the very common and very expensive kinds if illnesses, you will get 800,000 in advance to help shoulder the cost of treating the illness. if the total hospital cost for 1 critical illness is 1.5M, don’t you think 800K is a great discount?Now, if due to critical illness you are removed from the picture at a tender age of 45 or barely 15 years after you started the policy, maybe your dependents will still depend on you and your loss will be tragic for them. It won’t be totally tragic as you already have the wealth for them to use to build their future.  And that could be:

TOTAL BENEFITS: 3M + 630K = 3.60M up!

at age 45, 36,000 x 15 = 540K worth of payments ONLY!

3,000 per month is a savings amount you can put into insurance instead of regular savings. You commit 3,000 with all your heart because you believe that the wealth is already there and while we never want to die, it’s really a hard reality and certainly in life.

If you are younger than 30, it means lower insurance charges, longer investment horizon to reach age 65 and hence bigger and better Fund Value return. So, the younger you get a policy, the cheaper and the better it is for you.

At your age today, do you think you can set aside 3,000 for your own protection the protection of your family’s future?

Message me right away! Let’s discuss your options.

Life Stages And How We Ought to Prepare For Them

All of us go thru different stages in life. And the starting stage here is the time when we graduate from the university with a degree that is meant to help us be ready for the future.

Rookie Years

Fresh from college, we start to build our own future from the money we earn from our first job. It’s that stage when the idea of finally being able to buy our wants (even more than our needs) coming from our own salary really excites us all. Just a year and some months earlier we might have already set our sights on the latest gadget, or that fancy restaurant, or the fancier wrist watch, or those pair of expensive shoes, or finally getting that credit card just to belong to the club of “swipers” but then ending up being downed with huge debt (I’m actually speaking about my own experience in this case). Granted. It’s the initial phase which I call the “me in control” life. And it’s fair to be getting all those from our own income as years earlier, we were at the mercy of our parents’ or siblings’ allowances which most of the time only left us a few bills and coins balance each week or month. We just couldn’t save for a single “want”.

The Dreamer Stage

Then perhaps 3 years into the job, we may already start thinking about the future. Backtracking the expenses made the past 3 years, there might be some realization that we have been “happy-go-lucky” all along, forgetting about the “saving for the rainy days” mindset, year after year. It’s because near-future wants suddenly become more expensive- we want our own house and lot, we want  to have our own car because our rich friend has started driving the latest car, we want to travel to HongKong because our neighbor was talking non-stop about his experience in HongKong Disneyland.

The Bitter Pill Swallowed

The realization that we haven’t saved that much; that we have wasted those 3 years may start hitting on us. This bad financial status could usher a brand new goal: Medium-To-Long term projects. Let us say we want to prepare for a 3D4N trip to HongKong with a 2 day Disneyland visit. So how are we going to go about it? How much are we willing to save each month? Have we already eliminated our debts? Are our 2 years in salary increase, if there are, enough to contribute to the savings? But what about emergency fund? Have we considered the possibility of losing our job and how we will source our expenditures if that happens? But what if we have a standing 18,000 debt from our best friend credit card company? The list of concerns could potentially be endless and we may not really even be ready for any Medium-To-Long term goals yet.

Financial Planning – The Foundation Phase

So before considering the Medium-To-Long term goals, let’s focus on achieving the following things, in sequence, if possible:

  1. Eliminating Debts – the hardest to achieve. Let’s target eliminating debt in the next 6 months.
  2. Emergency Fund – 3x to 6x of our monthly expense to cover for the “rainy days”. Let’s have this in parallel with item 1 but on a 70% by 20%  by 10% rule for the savings part. 70% to pay off debts, 20% for emergency fund, and 10% for “petty cash” fund. Once debts have been eliminated, savings will then be 80% for emergency fund and 20% to “petty cash”. Once the maximum target of 6x monthly is reached, we will have 100% of savings to be used for other means.  The general rule on computing for expense:  Expense = Income – Savings, where Savings equals 30% of income. The math is simple but the idea here is for us to make the Savings component a constant percentage.
  3. Protection – Are we the breadwinners of the family? Do they depend on us for their daily living? How much cash are we giving them monthly? is it 15% at least of our net income? Lower at 10%? Only 5%? Have we considered lowering our expenses for “wants” so that we can increase our contribution to them from 5% to 10% at least? Are we willing to give them more? If we are staying in the family house, should we not give them more to cover the bills and groceries?  But what if we suddenly get sick and not able to work? What worse thing could possibly happen? Death? Yes, that could certainly happen. Could we take a moment to reflect about this possibility and how it could impact our family?  I’d like to invite you to read about this post on Insurance Protection to understand better how we could potentially prepare something for our dear family should God decide to take us out of the picture.

The 3 steps above form what we call Foundation of Financial Planning. In the Foundation phase, we consider increasing cash flow (salary increases, promotion, new job with higher salary, other sources of income like direct selling, MLM, etc), eliminating debt, and insuring protection for the members of the family in any eventuality that would lead to us being taken out of the picture in this world. The Foundation phase could take us 2 to 3 years or even more to build. How soon we can accomplish this will really depend on our discipline, our focus, and our commitment.

Here is a post about Financial Planning for those who haven’t read.

Medium-to-Long term planning

Congratulations to us! We have built a strong Financial Planning foundation. So now that we complete the foundation of Financial Planning, we are free to establish our Medium-to-Long term goals. What is it that we want to achieve in 3 to 5 years? Is it the brand new car? the perfect home for us and our parents and/or siblings? Is it the HongKong Disneyland tour? How will we plan to achieve the goal? Do we set multiple goals? Setting multiple goals means multiple planning, saving, or investing also.

This is the Accumulation stage of Financial Planning; the phase where we start to invest our net savings. What are the ways we can invest? Let’s discuss some of them below:

  1. Savings Account – We already have this – Emergency Fund account (a must to be deposited in the bank), Petty Cash fund. Technically, this is not investment. Interest rate at 1% per year is not an investment proceed. if Inflation is 4%, the value or worth of our money is -3% each year. But we need to have savings account in a bank for our online transactions or when we have business transactions that we need to be able to quickly withdraw some money from the fund.
  2. Government or Corporate Bonds – This typically returns a fixed income either quarterly or annually and may range from 3% to 6%. This will beat inflation if returns are based on the higher band (say, 6%). However, this still is not enough for capital appreciation this is relatively safe.
  3. Stocks or Equities – Very high risk, very high potential return. That’s the mantra of stocks or equities investing. We can either invest individually thru online brokers, or we can pay some higher fee by having a human or institutional stock broker managing our fund. They can potentially return greater than 10% a year or a negative % if the performance of the stock is bad.
  4. Mutual Funds / UITF – Depending on the chosen fund, this investment medium managed by a fund manager could be bonds, balanced (bonds and equities), or 100% equities. Normally fund managers invest or trade from blue chip stocks of stable and rich companies.
  5. Insurance companies like Pru Life UK also offer Unit Linked investments to help us grow our money but with the addition of the Insurance component in it. The 4 other investment modes don’t offer the guarantee that should we be taken out of the picture, aside from the invested Fund Value (portion of our investment amount plus whatever growth after having been invested) there is a Sum Assured amount that our beneficiaries can also get when death benefit is claimed.

Preparing for Retirement

Our 3 to 5 years Medium-to-Long term goal may potentially help us achieve our immediate, “big time” dream(s). But we also may start thinking about the time when, due to old age, we quit from work and just enjoy the remaining years of our lives. That’s farther down the horizon. Having worked for 10 to 15 years, we may start feeling the need to prepare for our future – that is, considering where we could source our means for the expenses we will need in the future.  So what do we really need in the future? How old do we really want to retire? 55? 60? 65? After retirement, how many years do we think we will leave before The Lord will let us finally Rest in Peace? The formula below could help us examine our retirement needs:

  1. Monthly Expense at retirement age
  2. Yearly Expense:  Item 1 x 12
  3. Years to use expense amount: number of years before we expire after retirement
  4. Savings already made

      Retirement need: (item 3 x item 2) – item 4

      Example:

  1. Monthly expense planned: 30,000
  2. Yearly expense: 360,000
  3. After retirement, years expected to live: 15
  4. Amount already saved for retirement?:  300,000
  5. Total Retirement expense need:  (360,000×15) – 300,000

So much should we prepare for our retirement? 5,100,000!!!

That’s a huge amount to save! We definitely can’t have that by saving in a bank in our lifetime. We can’t achieve that if we save it thru bonds either. So that begs the question: What investment can help us achieve 5.1M by age 65? if we are 32 right now, we only have 33 years to gather 5.1M in order to enjoy 30,000 per month worth of expenses. Is this really attainable?

There is definitely a way. Please read this Retirement Planning post.

We can compute for how long we can double our money. That’s what is called as Rule of 72. It’s important we have knowledge on what medium of investment to decide to help us reach our target retirement plan. So if we  can only invest some money for some number of years, we need to invest that money in a medium that could potentially double that amount within the number of years remaining before we retire from work.

Rule of 72

The rule states that to double our money in some number of years, we need to divide 72 by a certain % which is the rate of growth of the investment.

For example, if we invest in medium where the return is 10% annually, here is when it will double:

            Years to double = 72 / 10 (from 10%)

Our money invested in a medium that returns 10% annually will double in 7.2 years! If we want to double it in 2 years, how much should be the growth rate? 36% compounded growth per year! Anything that says money will double in 2 years, is just too good to be true. That’s either legitimate business or a  plain SCAM!

Here comes the Bride or Husband…then the son, and daughter, and son…

So it was good planning for retirement. We identified our growth prospect so that we can live comfortably in the future. Then suddenly at age 35 we finally found the urge to build our own family and to raise kids. The first of these future kids will,  at age 18 or 19, start college. We are again led to think about how we can prepare them for their future. How are we going to prepare them for the expensive high school tuition and miscellaneous fees? what about the more expensive university tuition? Have we become managers where our salary will help contribute for their education? Even if we earn a salary of 200,000 being managers, how much should we contribute to investment so that we can conveniently send our first born at least to a college which collects a total of 2M? what if the future cost is 3M? or 4M? But we have 3 kids! Fast-forward, if for example our first born is 3 years old, he has 15 more years to go before he enters the university which asks for 2M for the entire degree. Is there a way to prepare for this? how much? Please allow this post on Educational Planning to help us out.

A Life of Stages, a life better prepared

Life is Beautiful, according to a movie title. Rightfully so! Life is mean to be enjoyed, free from mental, psychological, and emotional stress, more so, financial stress. When it comes to money, especially in married life, problems arising from money needs often become the source of conflicts within the family. It is also the source of major headache. The remedy is not to be complacent about the future needs hence, the need to not take financial planning for granted. We all need to be prepared for the future. And there is much we can do to live a comfortable life, today, the near future, and the future over the very long horizon.

It’s about commitment. Our commitment to ourselves, to our family and loved ones, to our community, and to the next generation after ours. It’s a commitment to be financially free and to be financially prepared now, tomorrow, and in the far future.

 

Preparing For Our Kid’s Education

We all dream of giving our kids the opportunity of a great education, sometimes to the extent of enrolling our child to a prestigious university in the hope that as he graduates and starts his career, his vast network of connection, having been affiliated with that prestigious university, will help jumpstart him into a lucrative career whether it’s employment or business. If we raise an intelligent kid who will grow up to be a consistent with highest honors or valedictorian academic excellence awardee, then we may enjoy a very good discount, even up to 100%, of tuition fee from that university. Some athletic kids may also grow up to become famous varsity players helping out to eliminate the parents’ worry on how to cover their education.

But what if our kids belong to the regulars, the remaining 20% or 30% top students? How are we going to send our children to school?

We go back to how we decide to to invest our hard earned money to prepare our kids to college education. As savings account deposit is out of the question, we are left with bonds or equity or a variable unit linked insurance which gives both an insurance component and an investment fund. Being a business owner will also help.

As I am a Pru Life Financial Advisor, allow me to explain how to prepare a good educational fund for your kid. My example would be for an insured 3 year old child whose parent is the policy owner. The 3 year old kid is planned to enter the University of the Philippines in 14 or 15 years. According to the Tuition Fee Projection, a student planning to entire the University of the Philippines needs to be prepared something like 1,066,034 for a 4-Year Course.

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Preparing this early can definitely help. There is a Pru Life UK product which is designed to help us prepare our kids future education in the university.  As our sample is a 3 year old kid, we may insure him for a limited pay arrangement, 7 years or 10 years so that the money invested will have enough time to grow.

Considering 100% Equity fund as investment fund to choose, this could potentially return an annual average of 10%. This is not guaranteed as the chosen investment fund may perform well or perform poorly in a given year. But if we have high risk appetite, we may want to consider this as Equity fund gives the a very high annual rate of return compared to the other funds. A Suitability Assessment Form needs to be filled out to determine the type of investor we are, whether we have a Conservative, Moderate, or Aggressive investor risk profile.

By limiting the number of years to pay, we pay higher premium so that the annual total amount invested early on giving more room for potential growth.  There is also a unique rider that can be attached to the policy to guarantee that the child’s premium will be paid even if the payor’s life expires hence not able to pay for the premium. This is called the Payor Waiver. The premiums will continue to be paid by Pru Life UK until the child reaches the age where he can already pay on his own should he decide later to continue the policy and make it his retirement plan. Despite the limited number of years to pay, the insured is still covered until age 100.

By age 18 or 19, the projected Fund Value shall have been enough to cover the projected tuition fee targeted for the child’s educational plan if enrolled in the University of the Philippines.

Should anything happen to the insured child, the beneficiaries including the parents will be able to recover the investment thru the Sum Assured amount plus the Fund Value at the time of the insured child’s death.

To the reader,  I can help you with your child’s educational planning. Do you think you need to consider creating an educational fund for your child this early? If your child is still 7 months old, we can already create an education fund for him or her.

If you want to know more about how to go about getting an educational policy, send me a note to pruactiveadvisor@gmail.com