Life insurance investment or small business?

Question: Should I invest in a life insurance or use the money to expand my small business?—Mary Anne Maloles Tesoro via Facebook

Answer: I am a firm believer of life insurance. I make sure my life insurance policies are always in force as they give me and my wife peace of mind. With the way I travel and the many hazards I face like sleeping audiences and bored readers, life insurance is an important risk protection tool for me. Life insurance is first and foremost a tool for risk management by way of a risk transfer mechanism. Simply put, certain life risk such as untimely death or serious physical breakdown can be assumed by way of an adequate life insurance policy. Since I am married, happily at that, and have four lovely children, having the protection of a life insurance policy is a priority.

Life insurance as an investment is another story. The primary purpose of life insurance is to provide financial protection against life’s risk but investment can be a secondary benefit. It is difficult to compare life insurance with other forms of investments because of the nature of insurance itself. Life insurance needs to deal with actuarial tables and a lot of probabilities because of its primary tables. All those probabilities need to be accounted for and adequate provisions must be made. When you invest in a life insurance policy, not all the money goes to investment as some is allocated for insurance premiums. There are many types of life insurance but since you are referring to it as an investment, I assume you are talking about the variable universal life or unit linked insurance—an insurance  policy with an attached investment similar to Mutual Funds or Unit Investment Trust Funds. Variable type insurance will not perform at par with a mutual fund or a UITF because not all the money is invested in the funds—premiums for insurance protection are allocated from the money invested and these are recurring charges. The bigger the coverage, the smaller the amount goes to pure investments. Its advantage, however, is when the insured (or investor) dies, the named beneficiaries will get both the insurance coverage and investments as well as some estate tax benefits.

Comparing life insurance and small business is like comparing apples with durian, which are worlds apart. Further, the issue of risk and return comes to play in this concern and business is always risky and speculative. Business is also where you can really earn a lot of income and it can substantially grow your capital, albeit all the risk it carries. I’d like to look at insurance as a way to protect future income while business or investments is a way to maximize income. Will business be better as an investment? Definitely! A good business idea coupled with a good business plan and impeccable timing can make your capital grow bigger and faster than paper assets. But, as the saying goes, the higher the yields, the higher the risks. Most start-ups fail and the percentage of those that succeeded is quite disappointing. Yet, I believe we should take a wee bit more risk with our money and be a tad more entrepreneurial—as cliché as it sounds, no guts no glory. Just be prudent and know what you are getting into.

Know your objectives. If your objective is substantial capital gain or adequate provision of income, life insurance products are not the answer—business or other investments are. If your objective is moderate capital growth with financial protection against life’s risks, then life insurance is something you can consider. Also, life insurance products are long-term in nature.

Should you choose between life insurance and business? I say you may need both. If you have loved ones depending on you and your income, you definitely need to assess your life insurance needs. If you are disappointed with the gains you get from other investments like time deposits or special deposit accounts (yields are lower than inflation) then do consider other investments, small (or large) business being one of them.

Just a friendly reminder: Before letting go of your hard-earned money, investigate before investing; check out your alternatives and if need be, talk to professionals. Remember, prudence is always a good virtue.

(By Randell Tiongson, an advocate of life and personal finance. He is a director of the Registered Financial Planner Institute (Phils.). Repost from Philippine Daily Inquirer. 

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What does Life Insurance Pay For? The top 10 uses of Life Insurance (part 2)

Through the years, I have seen clients and friends go through difficulties when the breadwinner of the family suddenly has to go and be with our heavenly Father.  This has caused the remaining members of the family to go through hurt and pain and at the same time the uncertainty of not knowing where to get income to sustain them for everyday living.

I really believe preparation time is never wasted time, that what you prepare for years earlier, will set you up for even greater things in the future.  It is my dream for more and more Filipinos to live a life of stewardship, abundance, and responsibility.  And I really believe that God is setting our nation up for greater and greater things in the future!  That as we prepare and go with the desires placed in our hearts, there is no where to go but up!  I speak the best for every Filipino working both here and abroad, I really believe that 2013 is going to be our best year yet!

5. To transfer wealth

For the rich who wish to transfer their wealth to their heirs, a single-pay life insurance policy is a sound investment. It guarantees that the heirs will receive their share of inheritance upon the death of the insurer. The amount invested is guaranteed up to 125 percent when the insured dies. What is even better is the tax protection a life insurance product offers. The investment becomes tax free as long as the beneficiary is designated as an irrevocable beneficiary. That way, your heirs receive the full amount that you want to leave them without the government partaking its share. Furthermore, the investor remains in full control over the policy since he is the insured. This prevents the heirs from accessing the money and spending it prematurely.

6. To cover final expenses

Just because you are single and have no dependents does not mean a life insurance policy is useless. On the contrary, singles take out life insurance policies to cover final expenses when they untimely die because they do not want to burden their parents on the final expenses. The proceeds can cover these; and free the parents from additional financial pressure.

7.) To pay off loans

Most of the time, the purchased dream home is finance through a loan from the bank. The bank has the right to repossess or foreclose the property if the amortizations remain unpaid. Being dead is not an excuse to miss payment. That is why banks’ normally require mortgage redemption insurance so that the balance of the loan will still be paid off even with the death of the breadwinner. It’s a win-win situation for both parties. The bank gets the remaining balance and the family keeps the home as a legacy.
For business loans, creditors can be harsh and unsympathetic. It is common for them to demand the payment of the loan when the news of the demise reaches them. This could potentially disrupt business operations, which in turn cause failure. The proceeds of a life insurance can also pay off business loans and leave the family in peace to run the business.

8.) To pay off estate taxes

Wealthy people who are asset rich but cash poor could face this problem. The government imposes steep tax on the estate. For assets of P10 million and above, the tax is P1,250,000 plus an additional 20 percent on anything above the threshold. That means, if the total estate is valued at P200 million the estate tax give or take is P39 million. If his assets are illiquid, the heirs could face a difficulty in paying off the tax. In some instant, they resort to a fire sale of some assets just to raise the fund. Life insurance answers this problem by providing instant cash for them, which in turn can be used to pay for the estate tax and have the properties transfer to them smoothly.

9. To ensure business continuity

For business partners, the death of one partner is a threat to the existence of the business especially if that partner plays an active role in the operations. Typically, the spouse steps in because she has the right to do so. There is no problem if all of them can work harmoniously together. It becomes one if they can’t. The remaining partners may opt to buy out her share but if they can’t raise the amount needed, then they are stuck with her.

Insurance advisors have since recommended life insurance policy to fund a buy/sell agreement. The agreement is that the surviving partners or shareholders will purchase the deceased’s shares using the proceeds of the life insurance they took out using criss-cross purchase.

In a criss-cross purchase, the surviving partners are obligated to purchase the shares of the deceased partners from his spouse, while the latter is obligated to sell the shares to the remaining shareholders. This way, the business continues smoothly without outside interference.

10. To grow your money

Lest we forget a life insurance plan is also an investment tool (although it still is a life insurance product). The variable universal life insurance has been gaining popularity because the fund is linked to different asset classes such as bonds and equities. With the unprecedented growth of our local equities and the continuing rise in bond prices, a lot of policy holders are reaping the rewards through VULs.

As a matter of fact, some investors are opting for a single pay VUL instead of the mutual funds and unit investment trust funds because the former offers a guaranteed 125 percent in case the policy holder dies, and the proceeds are immediately paid to the beneficiaries. With the latter, the investment form part of the estate of the decedent and will only be transferred to the heirs after the payment of estate taxes.

The next time an insurance advisor sets an appointment with you to present life insurance plans, do yourself a favour and listen to what he or she offers. After citing 10 uses of life insurance, there’s definitely at least one you’ll find beneficial for you. Re post from Chinoy TV host Kendrick Chua

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Investments or Life Insurance? The top 10 uses of Life Insurance (Part 1)

I love budgeting.  I love saving.  I love investing.  I first built a rock solid savings account and just added up more and more on my investments from mutual funds, bonds, money market instruments, and my favorite of all — stocks.  This are all good things as they all help meet  my financial goals.

However, I really believe that in order for my investments to fly my financial house needs to be in order.  A skyscraper built on a bad foundation will not stand!  What does this mean?  It would be irresponsible for me to save and invest without protecting myself and my love ones.  Getting life insurance is one of the most the responsible things to do, it’s not about being morbid but it’s about letting your dreams go on for your love ones no matter what happens.  I have seen good investors lose a lot not because they made the wrong investment but because they did not build their financial house in order.  As your investments and responsibilities grow the more you should have insurance!

It’s my heart’s desire for more Filipinos to learn and enjoy the benefits of having life insurance!  It’s time for financial freedom!  Enjoy!

In the recent Asia Pacific Life Insurance Congress, a glaring statistic was bought up during a panel discussion: the penetration of life insurance in the country is less than one percent. It means that in a population of 90 million, less than 900 thousand Filipinos have a life insurance policy of some sort being offered by 30,000 insurance advisors nationwide. That is a far cry from Taiwan, which only has a population of 30 million, but serviced by 300 thousand advisors.

The sad reality is that there is still an aversion towards life insurance. Yet, life insurance has tremendous advantages for practically all kinds of people with different financial objectives. It is just a question of which feature will benefit you the most. Here they are:

1. To replace lost income

This is the main benefit of a life insurance and exactly why life insurance was created to begin with. When the breadwinner untimely dies, there is an economic impact on the survivors. The proceeds of the life insurance can continue supporting the family so that they continue enjoying the lifestyle they are currently experiencing. Or if they do have to adjust their lifestyle, the change would not be drastic. Life insurance could provide the cushion. That is why the insured should get a sufficient coverage that will ensure the continued financial support for is or her family.

2. To save regularly

If you have difficulty in saving regularly, getting an insurance plan can help address that problem. Since you will be billed regularly for your premium due, you have to pay that just like any other bill. You are forced to save through the payment of premiums. Some insurance companies even provide auto-charge or auto-debit service so that you would not miss a payment; or offer any excuse not to pay it. The premiums you are paying will accumulate over time and provide you with living benefit when you decide to cash it out eventually. This can be used as part of your retirement funding.

3. To fund critical illness

Contracting a critical illness can instantly wipe out your savings or put you in a financial hellhole. Statistics show that 90 percent of the Filipinos will either dip into their savings or borrow money to pay off medical bills associated with the treatment. A Health Maintenance Organization (HMO) helps offset some cost but the critical illness insurance solves that problem by paying out a lump sum when you contract one. The proceeds can be used to fund for the cost of treatment, and the medicines thereafter; or travel around the world before you bid it goodbye.

4. To fund education

Since the fall of College Assurance Plan and Pacific Plans in early 2000′s, the public has been looking for alternative means to fund their children’s education. After all, the need to obtain a good education is still imperative with or without these pre-need companies around. And through the years, there is a growing interest in life insurance plans as a means to provide education funding. Specifically, an endowment plan can provide guaranteed endowment benefits at a predetermined time that can serves as education fund for the child, not just in college but even in high school as well. Better yet, in case the policy owner dies prematurely, the company pays out the proceeds so that his beneficiaries can realize their dreams of obtaining good education.

5. To transfer wealth

For the rich who wish to transfer their wealth to their heirs, a single-pay life insurance policy is a sound investment. It guarantees that the heirs will receive their share of inheritance upon the death of the insurer. The amount invested is guaranteed up to 125 percent when the insured dies. What is even better is the tax protection a life insurance product offers. The investment becomes tax free as long as the beneficiary is designated as an irrevocable beneficiary. That way, your heirs receive the full amount that you want to leave them without the government partaking its share. Furthermore, the investor remains in full control over the policy since he is the insured. This prevents the heirs from accessing the money and spending it prematurely. Re post from Chinoy TV host Kendrick Chua

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