Saturday, January 31, 2009
Let me share you the most common noble reasons why people get life insurance:
1. "To unburden my family." Individuals recognize the fact that they have responsibilities and commitments to their dependents. They know that they have a major role in fulfilling their family's dreams to have a good education, and the magic words there are good quality of life. All of these have costs and it's the coverage amount which will partially help the members move on towards their goal - alone.
2. "To be shielded from certain taxes." If your beneficiary was declared as irrevocable, the cash proceeds are tax free. We are talking here of about 20% savings which he family can use for estate tax payment.
Estate tax surprises the asset-rich families. They never took into consideration the amount of cash just to transfer the properties to the heirs. In the Philippines, it can be as much as 20% of the market price of the properties. Insurance is the miracle product which solves the "cash flow" requirement of asset preservation.
However, there are some who hate insurance and below are the common objections:
a) "Insurance is a poor investment and it's better to invest in a the bank." I wonder what did the agent tell the client. Insurance products, whether life or non-life, are designed to protect against risks. As the time evolved, these products were linked to investments to attract the market. It's never positioned as an investment which will have the returns similar to that of stocks.
b) "I have enough cash that I do not need insurance anymore." Times do change and people need to realize that good times are permanent. That's why we have such thing as "there is always the first time." When crisis strikes, people normally can be caught unaware. And since cash is still the king in both good and hard times, it is still a prudent situation where you have a fallback just in case things don't work out the way it should be.
Friend, there is no right or wrong for these reasons. One is entitled to each and his own values and beliefs. But as a financial planner, I still encourage people to consider life insurance as part of their portfolio. You will never know what is in stored for you and your family- tomorrow.
Do you have any insights why people buy and do not like life insurance? Please feel free to comment so we can learn more from each other.
Monday, January 26, 2009
Have a personal vision. Enumerate your three important lifestyle dreams. Do you envision your children studying in an ivy league university ? Do you want to be retiring by 50 or do you like to toil until you reach 70? Visualization allows you when and how much resources and money you need to achieve the dream.
Determine your time horizon. If you want a house 10 years down the road, the saving strategy will be different from saving for a Europe vacation 2 years from now. You might want to invest in a retirement plan where you just put in money and avail the benefits at age 60.
Know thyself . You would know how risk averse or risk tolerant you are. There are investments that produce long term high yield overtime but the volatility is like a roller coaster ride. You may be attracted to the yields, but experience stomach acidity when the market crashes. This type of investment is not for you. You may be more fit to have guaranteed paying plans.
It can be the other way around , you may get so bored with single digit returns. And the moment the market slides down , you are the happiest person because you are buying at a low price. Then go for the equities and market linked type of investments i.e. variable life insurance or mutual fund investments
Allocate resources according to your needs. Financial planners and institutions can advise individuals matching needs, risk tolerance and time horizon. Some would have greater percentage of their money in investments, while others in guaranteed plans like life insurance policies and educational plan. No individual financial plan can answer everyone’s needs.
For the family to enjoy the benefits of a new house, you need to have a contingency fund to source from when illness strikes the bread winner. Or else the healthy members will be surprised to be the payors of the mortgage. Thus create a contingency fund which can be from your own funds or from the funds of companies like the insurance companies.
What you sow is what you reap. You need to do your assignment in knowing what it takes to pursue your dream. There is definitely no free lunch. Discipline and delayed gratification will make the difference in successfully achieving your vision.
Feel free to share your financial planning tips and experiences.
If you need more information about the components of a financial plan, click here
Related articles: Retirement Investing Made Simple