How to Choose an Investment Plan
WHY THE MOST EXPENSIVE INVESTMENT PLAN ISN’T NECESSARILY THE BEST ONE FOR YOU
Insurance is personal and there is no such thing as a "one-size-fits-all" plan.
Everyone has different needs and different wants. When it comes to life insurance, costs vary based on what exactly you want to be covered in your policy.
While choosing the cheapest or most expensive plan may seem like an easy way to choose the best one for you, you should also consider your priorities and how each plan will be beneficial for you and your family. When trying to decide which plan is best, affordability may play a role in your decision, and it's recommended that you calculate how much your current premiums will go up and whether or not this amount is more than your deductible. This way, you can decide whether it's truly worth it to put up the extra money and pay a higher premium in exchange for a lower deductible.
If you do choose a plan with less coverage and a higher premium, make sure that your deductibles are high enough so that you can cover them yourself while still saving money.
For instance, Juan earns PHP 18,000 a month while Carlo earns PHP 36,000. Let’s assume Juan and Carlo share the same kind of lifestyle and percentage of monthly expenses (let’s say 40% of their monthly income).
For Juan, the ideal insurance plan will have a premium of PHP 2,700 a month. While this plan fits Juan’s needs and lifestyle perfectly, the same may not be true for Carlo, since technically, he spends more on his monthly expenses. Juan only spends PHP 7,200 monthly for necessities, while Carlo spends nearly double that at PHP 14,400. Factoring in how much he has to shell out monthly for necessities, the ideal plan for Carlo would have a premium of around PHP 5,400 monthly.
Why the adjustment?
When figuring out the right plan for you, you need to take into consideration your lifestyle. If the unexpected happens, you need to have a plan that is enough to cover your daily expenses. This is why Juan’s plan won’t work for Carlo. Juan’s insurance plan with a PHP 2,700 monthly premium won’t be enough to cover Carlo’s monthly necessities worth PHP 14,400. The same would be true if we flip the equation. If Juan were to splurge and opt for a more expensive plan (such as Carlo’s plan with a PHP 5,400 monthly premium), he will be paying for coverage that is more than he actually spends. This means he is paying for more than he needs, which could be better spent on other investments or personal expenses.
Regardless of the plan, it is important to do your research and ask for advice from a professional and licensed financial advisor. Find an agent that will answer all of your questions without pressuring you into buying.
How to compute how much insurance you’ll need
There are many ways you can compute the right insurance premium for your needs and lifestyle. InLife offers a free calculator to help you compute your life insurance.
You can also use one of the four popular methods of computing for insurance below.
1. Human Life Value (HLV)
Using this method, you need to compute your human life value (HLV) or economic value to your family. This takes into consideration the value of your future income, expenses, assets, and liabilities.
This is one of the more popular ways to compute insurance because it gives you a better picture of how much money you’ll need while also factoring in inflation.
2. Income replacement
With the income replacement method, you assume that the life insurance should replace your lost earnings (in the event of your untimely demise). One way you can compute this is through this formula: insurance cover = current annual income x years until retirement.
For instance, Juan is 25 years old and has an annual income of PHP 216,000. He still has 35 years to retirement. He will need a plan with a coverage of PHP 7,560,000.
3. Expense replacement
This method is the one recommended by most financial planners. Using the income replacement method, you need to compute your daily expenses, loans, and goals (including your child’s education fund, if ever) as well as how much you would need to care for your dependents. Then, you need to deduct the current value of all your assets and any insurance you may already have. This will include the house you’re living in (if owned) and your car. The number you get is how much coverage you’ll need.
4. Underwriter’s rule
The underwriter’s rule states that the sum assured you need is 10 times your annual income. So, if Juan’s annual income is PHP 216,000, he should get coverage worth at least PHP 2,160,000. Keep in mind that this method is not recommended by many financial advisors as the number may be lower than what you need. In reality, you may need somewhere closer to 15-20 times your annual income.