It’s a risky world.
Life is full of risks – some are preventable, some can be easily minimized, some are completely unforeseeable but all can actually be managed properly. Insurance can be confusing and it’s hard to know what you really need or want. As we grow older, get married, build families and start businesses, you have to realize more and more that insurance is a fundamental part of having a sound financial plan.
On this post, I will try to share in simple terms very good reasons why you need insurance.
WHY DO YOU NEED INSURANCE?
To Take Responsibility of Your Final Expenses (Avail of Life Insurance)
It’s a reality that everyone, at some point, would have to die. Scary, but very true! So even single individuals without dependents should purchase life insurance as a way to ensure their funeral is arranged and paid for in advance, so the burden isn’t left to their families or beneficiaries.
For example, the cost of dying in the Philippines ranges between Php 200,000 to Php 1,500,000 (High End Burial Cost). So, your family or beneficiaries need at least Php 200,000 (at the time of your death) for a decent memorial service and burial lot. Of course you can further decrease this if you opt for a cremation.
To Cover Your Medical Needs (Avail of Health Insurance)
Getting sick in the Philippines can cause financial stress on many families, even bankruptcy. To prevent this, avail of health coverage that can come in the form of health insurance or health maintainance organizations (HMOs). An HMO is a business that provides customers access to a full range of medical facilities at the time of need in exchange for membership fees upfront. However that are certain monetary limits to in-patient and out-patient benefits and on a per illness basis. In most cases, members need only show their health cards to avail of the services.
On the otherhand, you can also purchase health insurance riders, like a critical illness benefit or daily hospital income benefit, to supplement your life insurance policy. The Critical Illness Benefit gives you a lump sum when you pass away or when you get diagnosed, while living, with a specified critical illness. The Daily Hospital Income Benefit pays a daily hospital allowance in case of hospitalization of the insured. Most of these forms of health insurance are settled through reimbursements.
To Protect Your Assets (Avail of Property Insurance)
Through the years, you have or would have acquired assets – a house, car, business equipments, gadgets, etc. Just like our life, our properties are also subjected to a lot of risks. Property insurance is a kind of insurance that pays benefits against losses or damages to a property due to the occurence of unfortunate events.
For example, you can have your home insured against fire, lightning, floods, robbery, etc. OR you can have your vehicle insured under a Compulsary Third Party Liability, wherein it pays for damages up to a certain amount in case of accidents.
To Minimize the Financial Risks While Travelling (Avail of Travel Insurance)
Travel insurance can minimize the considerable financial risks of traveling: accidents, illness, missed flights, cancelled tours, lost baggage, theft, terrorism, travel-company bankruptcies, emergency evacuation, and getting your body home if you die. Each traveler’s potential loss varies, depending on how much of your trip is prepaid, the refundability of the air ticket you purchased, your state of health, the value of your luggage, where you’re traveling to, the tour company and the airline.
To Protect Your Family and Loved Ones (Avail of Life Insurance)
Are you the head of the family? Are you a parent financially supporting your family? Are you someone who other people (young or old) depends on? Then, life insurance is a must, because it would replace your income when you die. When the breadwinner of the family dies, you not only lose the person physically, but also lose the income he/she earns for the family. Also, like most parents you probably want to know your children will be well taken care of when you’re gone. You not only want them to get a quality college education, but to provide for other life ventures like getting married or starting a business. For this reason, additional coverage is absolutely essential.
For example, the breadwinner earns about Php 500,000 a year for the family, and let’s say the family has access to an investment that would give them a rate of return of 5% a year. That will be P500,000.00 divided by 5%, which results to Php 10,000,000.00. Which means the ideal life insurance coverage for income replacement is Php 10,000,000, which, once received by the beneficiaries, will be invested in an investment that would yield the acceptable investment rate of return (5%).
To Pay Off Debts and Expenses (Avail of Mortgage Redemption Insurance)
Ever wonder why life insurance is required when getting a bank loan? Creditors use life insurance as a sort of a collateral to ensure that debts will be paid, dead or alive. In addition to providing income to cover everyday living expenses, your family needs insurance to cover any outstanding debts, like the mortgage, credit cards and car loans. You don’t want your heirs or beneficiaries to be left with any extra financial burden in addition to the emotional burden they’re already suffering.
To Leave Your Assets to Your Heirs (Avail of Life Insurance)
Estate taxes is seriously considered when an individual is slowly building up his/her wealth. Whenever you purchase an asset, especially real estate, you should purchase additional life insurance coverage equivalent to 20% of the market value of the asset. Why? Every time you purchase an asset, you are giving burden to your heirs/family, 20% of the market value as an estate tax when you die. Life insurance ensures that cash will be readily available to beneficiaries to pay for the corresponding estate taxes. Would you want that the fruits of you lifetime work go to the hands of the government, auctioned in a very steep discount, just to pay for the taxes? Of course NOT!
To Leave an Inheritance to your Heirs (Avail of Life Insurance)
If you don’t have any other assets to pass to your heirs, you can create an inheritance by buying a life insurance policy and naming them as beneficiaries. This is a great way to set your kids up for a solid financial future and provide for any monetary needs that will arise. For a fraction of a cost, life insurance proceeds could leave millions to the heirs.
Insurance is indeed an indispensable tool in financial planning, and should not be taken lightly. Insurance is important because it protects a person or entity from extreme financial loss or responsibility due to an unfortunate emergency, accident or negative unforeseen event. Each insurance product serves a different purpose and you need to avail them to protect a certain aspect of your financial plan. Anyways, I hope you see the importance of insurance and start thinking about it, if you haven’t already.
Keep in mind: Insurance is a PROTECTION tool, NOT a wealth creation tool.
photo credit: ‘Skipping Stones’, United States, New York, New York City, Manhattan Bridge via photopin (license)
2 thoughts on “Why is Insurance an Essential Part of Financial Planning?”
Hello Money Girl, I’m planning to buy a house and reading blog post about housing loan before I jump in to a long-term commitment. I’m curious to know if fire insurance is part of property insurance? Which is better to avail for home owners?