Importance of Life Insurance as a whole

  • Life insurance is important for “Critical Years” – this is the period of your life when your children are still of young age and cannot provide for themselves. Critical years are also the time when you have dependents that don’t have a means to financially aid themselves when you are no longer alive.
  • Community relief and mindset development. It contributes to the welfare and progress of the country. How? By partially relieving the community of the care of dependents, encouraging provision for the future, developing a “forward-looking” mindset among the citizens and accumulating capital through investment in commerce and industry.
  • Collateral for borrowers or access to capital – If you secure a loan from a bank or financing institution, they may want you to sign-up for a life insurance policy or use your existing one. Recommendation? Make a collateral assignment and assign the bank as your beneficiary. Here, you give assurance to the bank that when you are taken out of the picture, the proceeds from life insurance will cover your loan’s remaining balance. You can then get a bank loan.
  • Business continuity – When the heirs of the business owner are not interested or skilled to continue the business, life insurance can be used to ensure the continuity of the business. This involves instituting an agreement with the most trusted person in the business, and a lawyer.
 

Guaranteed death benefits for the following purposes:

The keyword is “Guaranteed” – Life insurance provides guaranteed death benefits for the following purposes:

 

  • (1) Clean-up fund – when a person dies, there may be payments to be settled such as hospital bills, death care, burial, car loans, housing or condo mortgages, and estate taxes.
    • Case 1: Pablo signed up for traditional life insurance at age 30 with a death benefit of P1.5 million. He got married at age 33 and kept renewing his life insurance policy until he was diagnosed with cancer at age 56. Pablo spent weeks at the hospital for 6 months, his family incurred a debt of 500,000 from their aunt in the US for the hospital bills, and Pablo died at the 7th month. How will his life insurance policy help him?
      • Solution: If the policy is in force, the guaranteed death benefit of P1.5 million could help his family’s “clean up” obligations. It can pay their 500,000 debt from their aunt in the US, pay for the death care and burial expenses of Pablo, and pay estate taxes for the transfer of his assets to his wife or children as the case may be. If Pablo’s children are still in school, the remaining balance may be used to sustain their education until they become employable and able to find a job.
  • (2) Cushion fund – Cushions the family’s sustenance when the breadwinner dies. It will be used by the surviving spouse to raise up the small ones until he/she is able to find stability. It can also be used to hire a helper, acquire services, or transfer residence.
    • Case 2: Moses and Zipporah were high school sweethearts for 10 years They were both engineers. After getting a stable job, Moses signed up for a death benefit of 2 million pesos and an additional 500,000 pesos accidental death benefit. Then he married Zipporah. They were blessed with 2 children – Paul and Silas. Moses and Zipporah agreed that the latter will become a stay-at-home mom to take care of their children. When the children are at the age of 6 and 5 respectively, Moses died in a car accident. How will life insurance help the family?
      • Solution: A total of 2,500,000 will go to his wife, not 2,000,000. It is the sum of the 2,000,000 death benefit and 500,000 accidental death benefit. The primary use of that money is to cushion the financial burden of Zipporah while she raises the children until they are able to take care of themselves, and until Zipporah can find a full-time job. It can also be used by Zipporah to pay for a relative or nanny to take care of the children while she will work in the daytime.
  • (3) Educational fund – pays for the tuition of the child or children. When the breadwinner dies, the surviving spouse is left alone to raise money for education and care for the child. The educational fund is very crucial before a child graduates from grade 12 or college because it is only when they can be employable.
  • (4) Mortgage redemption– life insurance pays for the housing loan and ensures shelter for your children. Without life insurance, the surviving spouse may have no means to pay the monthly amortization in the bank or in PAGIBIG, and the family will be in danger of losing a home and stability in life.
    • Case 3: Ryan has been working as a seaman for 5 years. One day, he decided to buy a house for his wife and 2 young children. He paid the P3M balance via a P3,000,000 loan from BBB Bank. At the 7th year of his life as a seafarer, he signed up for life insurance. In the 8th year, he died in a work-related accident. His wife does not have a job. Will they lose the house?
      • Answer: GR – it depends. (1) If Ryan’s life insurance coverage is sufficient to pay for the remaining bank loan, they won’t lose the house; (2) If Ryan’s life insurance proceeds is below the balance of the house, (e.g. the balance is 2.9M, and the death benefit of LI is 2M), it depends if they have other savings and if the wife wants to pay it to the house; (3) It also depends if the policy is in force when he died.
  • (5) Emergency funds – Life insurance benefits are not just enjoyed at the time of death. There are life insurance policies with a savings component, and others with an investment component or VUL which can be used for emergencies by the insured or the owner while alive.

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