What’s the use of life insurance?

Excerpt from an article-MF Phils.net

Ask yourself this, what’s the use of life insurance? How much do you need? How does one grows out of needing a life insurance?

A Family Of  Five

To clearly explain how I think about life insurance and the type of insurance, consider a scenario of a family of 5.

1.      The Father – The breadwinner. Takes home P25,000 per month of income.

2.      The Mother – A housewife. Does a little part time here and there but mostly focuses on the hose. Earns around P5,000 a month of extra side job.

3.      The College First Son – A son in college taking up engineering.

4.      The Highschool Daughter – A daughter graduating in highschool.

5.      The Baby – a year old baby.

The household has a combined income of P30,000. And let’s say that the family has a monthly expense of P25,000. They have a savings of P5,000. (Everything is for illustration purposes.)

Now to clearly illustrate my point. Which of them needs an insurance? Do all of them needs an insurance?

Not all people has the money to buy an insurance. Like our example family. They only have P5,000 of savings every month that they could put in to insurance (or investments).

They still need to allot money to invest in mutual funds if they want to retire happily. Investing lesser amount would only mean they will need to work far more years before they can retire.

The Father Died

Now let’s say the Father died. The income of P25,000 per month GONE! The family is in trouble. The kids will need to get out of school to work. Mother would need to work. Baby would be neglected for the lack of time. Everything would be a lot harder for the family. The mother can’t pay the estate tax. Funeral service costs, they need to borrow, digging the family in more debt.

Life insurance protect us from this situation. If you are the father, you protect your loved ones from this kind of situation, shall come the time for you to part from this world. This is the best example of life insurance at work for the right person.

Consider that the father used the remaining P5,000 savings to his life insurance. Neglecting to buy all other family member their own life insurance. When its time for the father to die, they’ll be well taken care of financially. There would probably more money left for a few years of college for the kids before they can get a job and help their mother. Life is easier.

How Much Insurance Should I Get?

Let’s go back the the family example. If we are asked how much The Father should get as an insurance, how much would you suggest? You can go crazy and say P10M and the family would live happily ever after. But the cost of that would be insane for a household income like that. Remember that you, have a finite resource (money). Get only the least amount, cheapest amount that you could get that will still get the job done.

So how much is it? The 2 kids one in college and 2nd going into college. If you’re the father you want to provide the schooling for them. And probably for the baby too. You want to insure yourself that the money they would get, would be enough for their expenses and will get them to graduate. So you would have to compute how much money they would spend in expenses plus the money they would spend for school up to the point they graduate plus estate tax plus the funeral cost for yourself. That is how much you should cover.

How much insurance to cover:

expenses of the family + expenses of the kids up to graduation + funeral expenses + estate tax

But you could go cheaper than that. Keep in mind that the son is already in college. Maybe you want to make him graduate and give him a year or two to find a job. After that, they’ll be well off and you have done your job. In this case, your insurance cost is much lesser. And the first born son would provide for the family, keep his sister in college until the sister is able to help too.