A Smart Filipino’s Guide to Investments and Life Insurances

Our society views investing as an intriguing and neglected activity because of lack of education and of a culture that fails to be provident. While life insurance, due to its morbid nature (only beneficial on one's death), has developed a misleading definition and is not generally considered in one's life planning. Millennials thereon has become skeptic to these terms—topped with the rise of consumerism, which lives for the desire to want more, acquire more, but not save more and prepare more. More commonly, our generation, which should be the most educated, insofar suffers on bad practices with money management and the naiveness with financial jargons and financial intricacies in the government. These all become root cause of our failure to upgrade our money habits and to jumpstart activities that will take care of our financial life throughout the decades. Even to a minimum wage employee, it’s not difficult to foresee, prepare for, and save for—foundational learning and planning are all it takes.

If we go through the roots, financial literary’s not in our academic curriculum; hence, we enter the workforce with minimal knowledge on such topic. Because of such insufficiency, we develop a poverty mindset that consequently hinders our long-term thinking and preparatory mesasures for our should-be financial commitments. For a typical employee, major financial milestones are not even taken care and thought of until the dawn of early 30s. This failure of preparation leads to financial setbacks that can cost you bankruptcy/massive loss of funds. Each day that passes without knowing much about your financial life is detrimental simply because of two reasons: investment becomes pricier as we get older and we are missing out on the financial rewards on certain stocks’ performances.

In order to guarantee financial success, we must know how to plan for the following: retirement, investment, and inheritance. These are all milestones on your life journey and are facets of a healthy financial planning. Financial planning can be consulted for with a financial expert. These experts typically hold such professional titles:

  • Licensed Financial Planner
  • Certified Investment Consultant (CIS)
  • Registered Financial Planner (RFP)
  • Lawyer
  • Accountant

Preparation for financial milestones should start on the day you receive your first paycheck. However how small that amount is, you must be able to properly allocate how much goes to your financial funnels. We usually put our savings on bank. A bank is a good reservoir if you want security and minimal risk toward losing your money’s value (the bank’s annual return is around 0.25%). Your money’s basically sleeping there. 

If you’re already earning a monthly income, it’s imperative to apply the smart money management principles

  • 50% goes to your primary expenses
  • 30% goes to your secondary expenses
  • 20% goes to your emergency fund/savings/investments

Before we tackle financial planning, you should know and plan your financially-dependent goals. These can be going to graduate school, traveling abroad, buying a house, etc. Afterward, know how much you’ll need and how long it’ll take for you to get them 

  • Short-term = < 5 years
  • Medium-term = 6-10 years
  • Long-term = > 10 years

These will help you strategize and properly properly allocate funds for your financial plans. Financial plans are contracts with a financial company (e.g. insurance, mutual fund, individual stock) that will keep your investments in the hope of growing it.

Now that we’re all set with our plans, let’s put them to work.

Investing gratefully acknowledges the concept of compounding interest. This is the heart and soul of investing. Compounding interest, as evident in its name, is an interest in money that accumulates over time, which you should take advantage of, so that your money can earn more, while you still live your life.

Retirement and Investment Planning

Retirement and investment can both go hand in hand, as both are rooted from one concept: growing your money. Whatever your investment’s future value, you can use that for sustaining your living throughout retirement and/or funding your goals. One is encouraged to have 2 investment plans: 1 for retirement (long term, no withdrawals) and 1 for invesment (medium term, allowable withdrawals). The latter one can be used for business capital, fund for future goal, or emergency fund. This plan’s supposedly your bank savings plan; however, the bank only yields less than 1% annual growth, hence you’re missing out on your money’s real earning potential. Why let your money sleep if it can grow while you live?

Why have retirement plan? Simply to outperform the inflation rate during your retirement years. The inflation rate is roughly 2% every year, so that’s around 2% of price increase on commodities. Imagine how much goods will cost on your retirement years. Your SSS/GSIS pension plan will roughly not be enough to sustain your living come retirement years, although it’s good resource to have, but insufficient to stand on its own.

For investment plan, once you have sufficient funds, you can invest in single stocks, mutual fund companies, life insurance companies, real estate, or business. Since real estate and business are widely known, I’ll just discuss the former three. Single stocks are for those who are well-educated on managing their own investments—having developed throughout practices strong patterns in knowing when to buy and sell specific stocks so that investments end up with more gains than losses. Mutual fund companies are for those who don’t have the luxury of time and, to most, knowledge in managing stocks—a professional fund manager will be investing your money in diversified stocks/companies in order to minimize risk of losses. Life insurance companies, similar to mutual fund companies, also have their designated asset management/mutual fund companies, but they come with guaranteed life insurance coverage. They originated as just a pure insurance company that guarantees lump sum cash on the event of one’s death. We’ll talk about life insurance in a while. To make it clearer, let's look at this relationship:

Philam Life’s (life insurance and investment) mutual fund company is Philam Asset Management, Inc. (investment), which has a historical performance of 15% annual growth at an average. You can check www.pifa.com.ph for mutual funds companies’ performances. 

Inheritance Planning

Now, let’s talk life insurance. Life insurance is the heart of inheritance planning. Contrary to its popularized futile connotation, life insurance is for your loved ones’ benefits. Technically, we refer them as your beneficiaries. They can be your spouse, your children, or your parents, or a mix of those. These beneficiaries will receive your life insurance coverage (in the form of a lump sum money). Though life insurance will not be for you, it will be used for significant purposes,  which are usually for:

  • Payment of burial expenses
  • Payment of your current debts
  • Payment of estate tax
  • Livelihood income (useful if you have people depending on you for finance)

Determining your life insurance coverage is based on either your income or your assets’ value (include to-be-inherited assets):

If Income = 10x your annual income

If Assets = Certain % of total value/value if liquidated (this is referred to as estate tax - we have a computation table as basis)

The estate tax, based on Philippine law, is a mandatory requirement needed to be paid to government in order for your assets (including wealth—current cash, cash on banks, cash on investments) to be transferred to your beneficiaries upon your death. Otherwise, the estate/government will take ownership. That’s going to be a sad and hurtful reality if you allow that to happen. This aspect in finance is where most Filipinos are largely not educated on. Although there are other options for transferring your assets, like through wills and testaments, paying estate tax is the overall easiest, most convenient, and cheapest.

The table below is the current computation table for your estate tax based on the total value of your assets:

 

Depending on the amount of your assets’ value and projected expenses on your death, you may want to double check if you need two life insurance policies.

The modern investment plan comes with life insurance coverage. This is called Variable Unit Linked Plan, which you can avail from life insurance companies. On your scout for this kind of plan, these are the two important metrics to look for in the life insurance company where you’ll invest your money:

  • Historical performance of funds (How successful was the company in yielding high returns for their investments? Can we draw significance in growth? How does it compare with the performance of its competitors?) Check out www.pifa.com.ph
  • Latest ranking in the Insurance Commission’s Annual Report (How does it compare with its competitors in terms of Assets - Indicator of Wealth, Net Income - Indicator of Profitability, and Net Worth - Indicator of Stability?) Check out www.insurance.gov.ph

 

You may contact a Licensed Financial Planner of a life insurance company to start your Variable Unit Linked Plan. Click here to connect to a financial planner and receive a free quotation.

Josh Domantay