Sunday, April 14, 2013

Over-insured? Under-insured?

Let it be clear at this early: I am not an expert on insurance.

But I am deeply frustrated about people who think that all they need to achieve their financial freedom are life insurance policies. They may fall under the case of being over-insured.

I am also equally disappointed with people who has an insurance coverage way below their insurance needs and think that they do not need to increase coverage. They are what I call under-insured.

And they may sound arrogant when you talk to them.


1) "I do not need more life insurance coverage. I am insured by my company."

More likely, these people do not know that they are just covered under a group insurance policy. Group insurance policy are common in a workplace, but are these coverages really enough for your dependents in case of your untimely demise? P35,000? P50,000? I have yet to see a group insurance coverage that guarantees millions for the employee. Maybe a key-man insurance?

2) "I already have an accidental insurance worth P100,000."

Well, P100,000 might seem "big" for some people. But take note, this is an accident insurance coverage. Meaning, you need to be killed in an accident for your family to be able to claim the coverage. What if you die of natural causes? What if the hospitalization alone amounts to more than P100,000?

3) "I already have an insurance with company ABC. Why do I need to get another policy?"

Now, this is tricky. Insurance needs change throughout our lifetime. Some people got their first initial coverage when they were still single and only a little portion of their income was needed by their dependents. Semi-breadwinner?

But once they got married, had a baby, loaned a house and/or a car, they might need more insurance coverage. Sad thing is, some think what they got when they were single is already enough.

I believe insurance needs must be reviewed every couple of years or at the onset of a major financial responsibility like being a sole breadwinner, marrying, having a baby or acquiring a big loan.

4) "I am single."

This maybe true for some single people. But not all single are created equal.

Some are single and have no dependents at all. They have all the money for themselves.

But some single have relatives who are dependent on their income. For example, if you are sending your sibling to school.


1) "I have five policies. Those are enough."

Maybe they are enough or maybe more than enough. But these people need to realize that they need to set aside money for other purposes as well.

Life insurance death benefits are meant to be "enjoyed" by the beneficiaries, not the plan holder. If the planholder wants to enjoy his money, he should have investments.

Some planholders are hospitalized first... for so many days, weeks or months, before they die. Do they have ample healthcare fund?

And emergencies happen in a flash. If you are not liquid enough, you may have to surrender or loan the cash value of your insurance policies just to address emergencies. No emergency fund?

Insurance can also pay your debts UPON your death, NOT BEFORE. Your creditors may require you to have insurance so your family can pay them upon your untimely death... but insurance policies are not collaterals.

2) "I invests in insurance policies."

This is somewhat connected to the previous section. Some people "invest" all their investment funds in insurance policies, especially now that VULs abound in the market.

Problem is, they do not realize that there is no such thing as free insurance. The investment component is still charged the insurance premium even if you are not paying them upfront.

If you want investments, try VULs that focus more on investment, not insurance or just open an independent mutual fund account.

If you want insurance coverage, review VULs that focus more on coverage than investment, or review other types of insurance such as pure life or endowment policies.

3) "I have many goals and I address them through insurance."

Ok, what are those goals?

Income protection? Check, life insurance.

Investment for retirement? Half check, depends on policy.

Investment for my child's education? Hmmm? Maybe you need to think twice and look for other options.

Investment for a vacation you have been dreaming to go to in 10 years? Seriously, life insurance is your answer for this?

The primary purpose of life insurance policies is to replace the income of the planholder upon his/her death. The investment component of some VUL policies are just secondary.

4) "I have no dependents but I got myself a million-peso coverage because somebody told me to get it while I am young."

There seems to be nothing wrong with this argument. Especially if the plan holder really wants to give an inheritance to his or her family when he or she dies.

Problem is, if the "why" is not strong, chances are the policy will only lapse leading to a waste of premiums paid. I already talked to many yuppies who are paying life insurance coverage... but when I ask them why did they get life insurance, they can not give a clear cut answer. Only this: "the agent told me it's cheaper because I am younger."

Yes it's true it is cheaper when you are younger. But where is the "why?" And a million peso coverage for someone without a dependent may be more than enough as an initial life insurance coverage.

STRONG WHY's you need to think about

1) Because my family depends on my income. If I die, they need replacement income.

2) Because I have outstanding debts or loans today. If I die today, I don't want to burden my family to pay these off.

3) Because I want to live an inheritance when I die.

4) Because I have estates to protect and I want my heirs to have instant money to pay for estate taxes when I die.

WEAK WHY's you should be wary

1) "Somebody (my agent) told me I need it." (but did not explain why)

2) "It's cheaper when I am younger."

3) "My friend has one. So I got one."

4) "I want to have a million."  

I have nothing against life insurance policies. They are a great tool for building instant wealth for your families. I am just concerned about people who just buy even if they do not understand what and why they bought it.

Life is priceless. Being over-insured or under-insured is not really a problem if you know what you are doing without sacrificing the other aspect of your financial life such as emergency fund, retirement fund, healthcare fund, investments for enjoyment, debts and cashflow.


  1. Ouch.. Im one of those who got them while young. Tapos ko na sya bayaran. I was naive then when I equate savings to emergency fund. I got a new one which is halfway done but I will stop there for now till my circumstances change as im single and no dependents

    1. Maybe when you got the first policy, you thought of your family (parents and siblings). Maybe you wanted to leave them a legacy when you suddenly die. Our decisions are the rightest the moment we made them. So just charge everything to experience. =)

  2. Actually my company's life insurance is for 1M. 2M if by accident.

    I do agree about being over-insured. Usually a basic term life insurance is enough. And I really don't think VUL is a good investment vehicle in most situations, no matter how it is oriented.

    And you bring up a valid point. If you have nothing/no one to worry about or leave behind when you die, there's no need to get a pricey life insurance. A basic one might still be needed, to cover funeral expenses and the like.

    1. You have a 1M coverage from your company? Will you still be covered when you retire or resign from the company?

      A friend of mine had a life insurance coverage from his previous company. The good thing is, when he resigned, the company and the insurance company allowed him to just pay the remaining premiums to continue his coverage. And as I see it, the premiums appear to be discounted compared to the prevailing market rate. haha

    2. Yeah, it's a group rate. So it's a little lower. Plus, a company's population tends to be younger/healthier since it usually has very few "senior citizens", if any.

      Yeah, it's 1M. And no, I won't be insured anymore if I leave. My next company will be the one insuring me. or, if I go into business myself, I will have to insure myself.

  3. Hi. New reader here and trying to save up some money for investing. You're making it sound like investing is not as scary and intimidating as I used to think.

    Thank you for sharing. And on behalf of all newbies like myself, I hope you add explanations to the abbreviations you mention. Thanks!

    1. Thanks Mina Bey! About explaining the abbreviations, will keep that in mind in my future posts.

      And yes, investing is not scary and intimidating as long as you educate yourself.

      You can never cross the ocean by merely looking at it. No matter how intimidating the ocean is, you really need to cross it to get to the other side of the world. You just have to know the PRO's and CON's of your options. i.e. swimming, boating, riding a ship or riding a plane.



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