Free Life Insurance with BPI's Get Started Account

DEAR INVESTOR JUAN

Dear Investor Juan,

I have a question about insurance. I can't decide which of the two is a better option for my husband:

Option 1.Term life insurance for 2 million coverage with premiums in the table below

Option 2: BPI's Get Started savings account with life insurance (5x your adb maxium of 2 million). My husband has 100,000 at present which function also as our emergency fund.  I'm thaninking of putting in addition 300k so that my husbands coverage will be 2 million.

Do you think its better to just do option 1 and invest 300k in uitf? or choose option 2 meaning total saving 400k with 2 million life insurance,at the same time it will funtion as our emergency fund?

Please excuse my grammar and spelling as I have just given birth two days ago and in a hurry to write this as I would like to email you asap so to help me decide which option is better.

Thanks,
Maxine


Dear Maxine,

Thanks for your email and the very useful information that you have provided us.

The first thing I did was review the details and conditions for BPI's Get Started account. Everything seems to be above-board--it does offer free life insurance with no strings attached. The only possible drawbacks that I see are that only depositors who are 15 to 70 years old are entitled to free insurance and the minimum monthly balance of 25,000 pesos for ATM accounts (75,000 for passbook) is higher than other kinds of accounts, but these are not deal breakers, in my opinion. Also, like other savings accounts Get Started pays interest, albeit at a paltry 0.25%, but I'm sure other banks offer around the same rate.

Thanks for sharing your insurance quotation, it's really helpful especially for people who don't have any idea how much life insurance costs in the Philippines. While the annual premiums are not very high, they are also not negligible. So based on your options (which you formulated correctly, by the way), to get a 2 million peso insurance coverage on the first year, you can either pay 7,900 to an insurer or maintain a 400,000 deposit in a Get Started account. I understand your hesitation in choosing Option 2--keeping 400,000 in a savings account seems to be a waste since it can possibly earn more in an equity fund? But if you can justify keeping 400,000 as an emergency fund--which to me is completely understandable, especially if it's for your entire household--parking the amount in an account that provides extra benefits makes a lot of sense.

How much more value is Get Started providing anyway? Using your insurance quotes, maintaining a 400,000 deposit in the account earns 0.25% interest and insurance that is worth 7,900 for the first year. Which means that your deposit would effectively be earning 0.25% + 7,900/400,000 = 2.225% in the first year. Given the interest rate climate nowadays, that rate is comparable to yields on T-bills and time deposit accounts--but with Get Started you don't lose liquidity, which is a necessary feature of an emergency fund. So yeah, Option 2, most definitely.

For other readers who think 400,000 is too high for an emergency fund, just figure out the amount that is appropriate to you and deposit that in a Get Started account.

Finally, I make these recommendations based on the limited information that I have. If anyone knows comparable benefits offered by other banks, please do share the information with us.

Short Answers to Unanswered Questions: Advice for a College Student and Insurance Questions

DEAR INVESTOR JUAN

Dear Investor Juan.

I am Michael, a 2nd year college student and I am planning to invest some of my savings in a bank. What should I do then?

I am still ignorant about these finance stuff but I am really eager to know how to invest.

Thank you for helping me out. 

Michael


Dear Michael,

It's hard to answer your question without knowing specifics, but given that you're a second-year college student, I assume that:

1) You're still living with your parents
2) You don't have a job and your income just comes from allowance

Honestly, at your age and given the above assumptions, it would be best to just save and accumulate as much cash as you can--and yes, a simple savings account will do. Don't worry about not getting high
interest on your savings, that will come in due time, like when you get a job and have more disposable income.

As soon as you get a job after graduating, you can refer to these posts from a while back about getting started with investing:

http://www.investorjuan.com/2011/03/6-steps-guide-for-newbie-investors-part.html
http://www.investorjuan.com/2011/03/6-steps-guide-for-newbie-investors-part_28.html

I hope I was able to help. Good luck!


***

Dear  Investor Juan

I would like to ask your advice regarding HMO’s /Health Insurance. I have read a few articles regarding about it but I am still confused.

When is it necessary to have a health care plan / insurance? Isn't it enough to have a Life Insurance as well as Philhealth? Or would you advice to put the money on some investment instead?

Thank you very much. Your blog has been a lot help in straitening out my financial plan.

God Bless

rocloyd


Dear rocloyd,

When is it necessary to have a health care plan/insurance? In my opinion, we should be covered our entire lives, if possible. Work compensation packages usually include a decent health insurance
coverage, so you don't really have to worry about it if you're employed full time. If you're unemployed or underemployed, however, you have to make sure that you're covered with PhilHealth at least.

Life insurance is also usually a standard non-cash employment benefit. The need for it differs with a person's circumstances, however. For example, a person with a family would need it more than, say, someone who is single and is living independently.

And yes, to make it clear, I strongly suggest that you make sure you're adequately covered first (and have an emergency fund on top of that) before you invest in "risky" assets (such as stocks and
investment funds). Why? In a nutshell, because most likely you can only borrow at a higher interest rate than the return that you can earn from investments, so in case of emergencies and other situations
that require a significant amount of cash, you'd want debt to be your last resort.

I hope that makes sense. Good luck!

Short Answers to Unanswered Questions: Insurance Concerns and BDO vs BPI Part "N"

DEAR INVESTOR JUAN

Dear Investor Juan,

I’m 24 years old and is earning a decent income. About last month, I came across your blog and I’m glad I did. I just finished reading your all of your posts. Ever since I started reading your blog, I got into serious thinking about my future and finances. I just started opening investments in BDO and even enrolled in EIP. I’m aiming towards financial stability and having counter measures against the unpredictability that future brings. I’m still learning how to effectively manage my finances and make my money grow.

You caught my interest on your last post about insurances. Now I’m thinking of signing up for one. But I don’t really know much about it. First thing, which insurance company should I signup for? What plan should I go for? I’ve read few of Sun Life Financial’s products information but can’t decide. I’m actually quite confused about this one and I’m hoping you could provide your view about this to help me get a sound decision.

I hope you’d be able to shed some light to this. Thank you for taking the time to read my mail.

jbsalts


Dear jbsalts,

Thanks for your support, it means a lot to me.

To answer your questions, first get details about your employer-provided insurance coverage, which I'm sure you already have, from your HR department.

Get more life insurance only if you have dependents and/or you are the breadwinner of the family, and you think your company coverage is not enough.

For health insurance, you can ask your HR department if you can upgrade your company-provided coverage to include your family members if they don't have health insurance yet.

Regarding Sun Life's Financial products and other variable-life instruments, you might want to check out some of my past posts about the topic. In a nutshell, I advice against such insurance and investment hybrids because getting insurance and investing in UITFs separately is usually cheaper.

I hope I was able to help. Good luck!


***

Dear Investor Juan, 

I'm a newbie investor, I've just opened an equity and bond fund in BPI last January and that's before seeing the track record of BDO vs BPI. I'm really tempted to transfer to BDO cause it looks like BDO fund managers are a lot better. The thing that turns me off a bit is the convenience factor. In BPI I can monitor my investment online, and can subscribe and redeem online as well. If I choose too I can also do that regular subscription plan. I was searching the BDO website (I don't have a BDO account) trying to look for any mention of an online facility for investment but I could not find any, so it looks like I can't monitor online and I would need to go to the branch. I guess I'm just being 'tamad' since as you mentioned I can just do go to bloomberg website and see the latest price and do some math everyday to see If what I'm earning (loss)... I guess I just wanted to get your opinion on the convenience factor of having an online facility for BPI, vs no online.

Prince


Dear Anonymous,

I share the sentiment that one important (maybe the only?) benefit of going with BPI is convenience. However, how much that advantage is worth is purely subjective. Like you said, you're tamad, so maybe the convenience is worth more to you than a person who is not so tamad.

To help you decide, maybe see how much better a comparable BDO fund has performed against your BPI UITF in percent terms ever since you started investing, then multiply that by your initial investment to get a peso amount. Then ask yourself: is the extra convenience provided by BPI worth this much? If yes, stick with BPI; if not, move to BDO. It's like if you need to buy a sachet of shampoo and there's a store beside your house that sells it for 6 pesos and another store 5-minutes on foot away sells it for 4 pesos. Is the extra 10 minutes of effort worth the 2 pesos that you save? Only you can answer that.

(Follow up)

Hi Investor Juan, me again. I did some number crunching using the BDO and BPI investment calculator, and If I've done it right (and the calculators are correct)then below are my result comparing with my 50K investment in BPI and BDO. Summary: Dates Covered (Jan-Feb 2013 & 2012-2009) BDO Bond Fund Ave. Yield: 5.496% BPI Bond Fund Ave. Yield: 4.754% Difference: 0.74% Summary: Dates Covered (Jan-Feb 2013 & 2012-2009) BDO Equity Fund Ave. Yield: 30.402% BPI Equity Fund Ave. Yield: 19.652% Difference: 10.749% My Assessment for myself: For the Bond fund: I'll stay with BPI (for now) The 0.74% advantage of BDO on the Bond Fund does not fully out weight the convenience factor of being able check/subscribe/redeem my bond fund in BPI's mobile app anytime I would like to. On the Equity on the other hand... the 10.749% advantage of BDO over BPI for the same amount of time covered (2009-2012 and Jan-Feb 2013) is VERY significant!!! I shall be opening a BDO account this month! :D

Short Answers to Unanswered Questions: Stock Delisting, Pulling Out of a VUL, and Non-Monetary Returns

DEAR INVESTOR JUAN

Dear Investor Juan,

I am an avid reader of your posts and have just started investing 3 months ago. I currently have invested mostly on fixed income peso denominated notes as they I am not yet confident in my skill with stocks. From my readings on your post however I have not come across delisting of stock (maybe I have not read enough) from the PSE:

a. What happens to the stock?
b. Encashment after delisting?
c. Will the price still have a chance to go up?
d. Other concerns an investor should think before purchasing a stock which is going or planning to be delisted?

Sincerely,
Mike


Dear Mike,

Thanks for the question, it's a very good one. There are both negative and positive reasons for "delisting" from the stock exchange--making a stock unavailable for public trading. The "top-of-mind" reason, most probably, is if the company gets into trouble financially, such as if it is forced to go declare bankruptcy. In this case, investors should be able to get early warning from sharp and sustained declines in stock price, public disclosures, and even news reports, although losses may be unavoidable.

In some instances, though, a firm may have very good reasons to delist and revert to being "private," In this case, the firm buys back shares traded in the stock exchange, and public investors would receive a tender offer for their holdings.

In summary, and to address some of your issues regarding the possibility that a stock you own would delist, if it's because of the first reason then you should actually be concerned about whether the firm is capable of sustainable profitability rather than the possibility of delisting. And if the firm chooses to delist because of the second reason, then there's really no reason to worry because you should get at least the market value of your investment (more if the firm has reason to pay a premium for publicly-held shares) if it happens.


***

Dear Investor Juan,

I have started investing some of my savings in SunLife VUL (Equity Bond) since Nov 2007.
And i have started investing in BPI's UITF products, some in ODYSSEY PESO BOND FUND and a little in ODYSSEY PESO CASH MGT FUND, about a year now. I read one of your article or comments about ODYSSEY and about VULs, and it seems its not a good one, should I redeem my investment and invest it somewhere else?

In your own opinion, don't worry I will not blame you in case anything goes wrong, where should I put these investments? Should I just hold it there, and just make new investment. I want to make sure that I am investing correctly.

Thanks,
Aubrey


Dear Aubrey,

According to the "search" function of this blog (a feature everyone would do well to learn to use), I've only talked about Odyssey funds only once, and even then I did not talk about either the Odyssey Peso Bond Fund or Peso Cash Management Fund. After consulting Bloomberg, I see that these funds charge management fees of 1% and 0.75%, respectively, which are comparable to similar products in the market (at least there's no front or back sales load). Just based on this, I have no reason to recommend that you pull out of these funds.

Regarding your VUL... As far as I know another important "cost" of VULs (apart from higher fees) is the cost of getting out of the agreement early. So I suggest that you first contact your agent and ask if you can terminate the coverage and recover the portion of your premium payments that was allocated to the mutual fund, then get back to me with your agent's answer.


***


Dear Investor Juan,

Greetings from Dubai!

Are you having an income directly by posting articles in your blog?

Regards,

Marlo
Accountant



Dear Marlo,

No, I don't. As a matter of fact, I even spend a small amount periodically for extra cloud storage (which is shared among all my Google accounts and websites, actually) and domain name registration. But that does not mean I don't get anything out of what I do.

This blog is very rewarding to me, albeit in a non-monetary sense. First, writing something regularly (~9 times a month!) serves as good practice for writing my dissertation and other "official" writing assignments. Second, this blog gives me an opportunity to not only share what little I know about finance but also learn from the collective experiences of all you readers. And it forces me to learn about things that I don't know, or know very little about, and that's a very good thing. Finally, managing the blog, organizing and processing ideas about personal finance, helps me better manage my own finances to. Haha, so yeah, maybe the blog does offer monetary rewards, if only indirectly.

A Closer Look at VULs: Philam Life's Family Secure (Part 2)

DEAR INVESTOR JUAN

Dear Azeotrope,

First, let me clarify. The point of these past two posts is neither to encourage nor dissuade readers from buying the product. My main objective is to help you and other readers/potential buyers make an informed decision whether to buy the product or not.

Okay, now we end the dilly-dallying and go straight to the heart of the matter.

What is Family Secure? As Philam Life clearly illustrates in its brochure, Family Secure is a combination of a term life insurance policy and a mutual fund. It follows, therefore, that getting these two products separately from any provider should produce the same, or at least comparable, results.

One way to choose between Family Secure and a "do-it-yourself VUL" is to have an idea how much each alternative costs and make a comparison. Fortunately, Philam Life provides us with enough information that could serve as basis for such an analysis.

From the example in the brochure, we see how an annual premium of 30,000 pesos could be allocated between the insurance component and the investment component; according to the graphic, if you make the proposed allocation, you will have accumulated 2,507,062 pesos over 35 years, at an assumed annual return of 8%. One way to estimate the cost/value of the term life policy is to subtract the aforementioned value from the future value of the premiums if the entire amount is to be allocated to the investment component. Using the "FV" function of Excel (or Google Spreadsheets), and entering the following arguments: rate = 8%, NPER = 35 (number of payments from age 30 to 65), PMT = 30000 (payment at the end of every year), we get 5,169,504 (ignore the negative sign). This number tells us that as per Philam Life's proposed allocation, 5,169,504 - 2,507,062 = 2,662,442 pesos or more than half of the value of your premiums will go to insurance coverag. But remember that this is the value of your premiums after 35 years; to make better sense of it, we have to can convert it to present terms. This time using the "PV" function of Excel, enter rate = 8%, NPER = 35, PMT = 0, and FV = 2,662,442, and you'll get 180,073 pesos--the cost, in today's peso, of getting the same insurance coverage as the one indicated by the gray areas in the brochure example.

So how can we use these results in making a decision? Go to a term life insurance agent (even one from Philam Life such as your aunt) and ask for a quotation for the coverage in the example. If the present value of quoted premiums is greater than 180,073 pesos, then Family Secure is a good deal; if it's less, then maybe you'd want to consider the cheaper option.

Of course, Family Secure does have qualitative advantages that you may also want to consider. Well, to me one advantage: convenience. So even if this product is more expensive, but you don't want the headache of reading posts like this or using Excel or shopping around for the cheapest deal, then it may well be worth it.

There is one important disadvantage to getting Family Secure, of course: you lose flexibility since the plan is essentially a long-term commitment. While you are free to allocate your premiums from time to time, you do have to make regular premium payments for a predefined number of years, which implies penalties if you fail to make payment (I'm not sure about this, so you might want to ask your aunt). You're also limited to choosing a Philam Life mutual fund, and I don't think you can change the kind of fund after your initial choice.

So these are the things that you have to consider in deciding whether to get Family Secure or other Variable Life Insurance products. Whatever alternative you're leaning towards, don't hesitate to ask your agent questions, such as the points raised in the past two posts. Good luck, and I hope you find these posts helpful. :)

A Closer Look at VULs: Philam Life's Family Secure (Part 1)

DEAR INVESTOR JUAN

Dear Investor Juan,

Last night, my aunt (a Philam Life agent) just offered me their latest VUL offering, the Family Secure. I don't know if you're aware of this but let me show you these links for some info:

http://www.youtube.com/watch?v=4U7-GTWyj4k
http://www.philamlife.com/en/individuals/products-and-services/protection/unit-linked-protection/

I read that you are against this type of insurance. But I'm quite convinced by this Family Secure due to its flexibility to turn insurance into investments as we (the parent's-to-be) retire. I don't have a family yet ('cause I'm still 23!).

Maybe I just find it hard to look on the other side of the fence. In your opinion, is this worth a take? Or find an affordable term life insurance and invest in other things?

By the way, I want to take the ETF. It interests me more than of UITF. Thanks!

Azeotrope


Dear Azeotrope,

As I briefly discussed in this post about life insurance, the most important drawback of varaible life insurance products is cost: that you can get the same results for cheaper if you just get a low-cost term life policy and investment fund (i.e., mutual fund or UITF). That said, I haven't been able to show how this works, exactly, given the lack of actual information about specific products. That is why I would like to thank you for giving us this opportunity to better understand hybrid insurance-investment products like Philam Life's Family Secure.

For this "desktop analysis," we will use the information and assumptions on Family Secure's brochure and a few things we've learned about time value of money from previous posts (like this one).

So how does Family Secure work? You, the policy holder, pay a premium every year; each year, your premium is allocated between a term life insurance policy and your choice of investment fund (from Philam's mutual fund offerings), depending on your "need." Presumably, when you're younger, you need more life insurance since your dependents have more need of your earning power, so you pay more for higher insurance coverage and only a small portion of your premiums will go to the investment fund. As you get older, this dependence would decrease (as your children grow up and start their own families, for example) and you would need less insurance, therefore you can start investing a bigger portion of your premiums in the investment fund.

Taking a look at this graphic from the brochure, we see how premiums are allocated between the life insurance component and the investment component over the course of the policy holder's coverage. The gray areas indicate Philam Life's proposed life insurance coverage (the policy holder makes the actual decision), high from age 30 to around 50. From age 50 onwards, the part of the premium that goes to life insurance significantly decreases in favor of the investment component, whose value (at an assumed return of 8% per year) is represented by the red area. While Philam Life has actually done a good job clearly making a distinction between the two components of products in this graphic, they have also--perhaps inadvertently but definitely irresponsibly--misled readers that the amount of life insurance coverage and the value of the investment are comparable--in other words, that a peso of life insurance coverage is the same as a peso in the investment account (the graphic clearly implies that the differences in the heights of the bars mean something; another indication is how a red area is stacked on top of a gray area). This is not the case! The value of a life insurance coverage is the amount the policy holder pays for it, not the coverage amount: from the graphic, the insurance coverage of 3,135,000 pesos at age 30, only for that entire year, is worth 30,000 pesos--the premium for that year--and not 3,135,000 pesos! On the other hand, at age 65, the investment value of 2,507,062 pesos is worth exactly that (in that year): 2,507,062!

So how should have Philam Life presented this graphic so that casual readers will not make erroneous conclusions? First, they should not have stacked the investment value on top of the life insurance coverage amount anywhere in the graph. And second, they should have included a separate, clearly defined axis for the investment value on the right.

And in my opinion, they should fire whoever's responsible for this. This is very embarrassing, an amateurish mistake (?) for a company that's as big and established as Philamlife. It would make for a very good example in Statistics class, though, on how not to use graphs in presenting data; or maybe how to effectively misrepresent data?

Sorry, Azeotrope, this... discussion... went on for longer than I had hoped. I know I haven't answered a lot of your questions yet. Unfortunately, my answers would have to wait for Part 2 next week, where I will show things that we can learn about variable life insurance from the Family Secure brochure and discuss some questions that you can ask your aunt about this product.

Have a happy weekend everyone!

Short Answers to Unanswered Questions: Forex, VULs, and UITFs

DEAR INVESTOR JUAN

I've had a very busy past couple of weeks, so now I find myself with more than a handful of unanswered emails and comments from some of you. I will thus dedicate the next couple of posts to respond to these in a short but hopefully still-adequate manner.

***

Dear Investor Juan,

I would like to know your thoughts about Forex Trading. Is this a good investment? I only know very little about Forex. A friend of mine who works in Singapore said she has an officemate who earns a lot from Forex. Others also said it's faster to earn in here. 

I also don't know of any Forex Trading company in the Philippines. The thought of having to transact a foreign company with no office in the Philippines over the internet makes me have second thoughts about Forex trading. 

Can you enlighten me please? Thank you.

Neil


Dear Neil,

Like you, I also know very little about forex or currency trading. What I do know is that it's just like any kind of speculative investment: "traders" or investors buy and sell particular currencies based on their expectations for the future prices of these currencies.

As I've said several times in this blog, I strongly advise against forex trading and most other speculative investments mainly because expectations about future prices tend to be based on hunches, gut feel, and luck and there is very little emphasis on fundamentals. And of course you'll hear more success stories than failed forex trades: who in his or her right mind would brag about a losing trade, right? So yeah, stay away from forex trading, especially since you admitted at the very beginning that you know very little about it.

***

Dear Investor Juan,

I have just started reading your blog and I may I just say how enlightening it is to read about savings and investments for a change. I am not really the saver type, more like the spender, but circumstances have changed and now I find the need to save more money. What changed? My husband and I now have a baby and now I find myself thinking about my baby and her future more than anything else. Soooo, having said that, I need your opinion on how and where we can invest to maximize our resources.

To start, we already have an emergency fund. In addition to this, my husband and I both have Sunlife Maxilink Balanced Fund (got it 2 years ago), and term life insurances. Now we have extra cash which we want to invest in. At first we were decided on getting another VUL from Sunlife but after being enlightened by your blog, I see the need to diversify and probably venture into Mutual Funds. But before that, what is the difference between VULs and MFs, except that the former has life insurance tied on it? If I invest the same amount for the same period of time, would I get the same return? Which one has more value for money?

I would really appreciate your advice and let me thank you in advance for all of your help.

Looking forward,
Khristine


Dear Khristine,

Congratulations on the baby! And for being more financially responsible now, that's a very big first step. :)

In a nutshell, a VUL is a combination of a mutual fund and straight insurance; it may seem that you're getting one or the other for free, but you're really paying for both. Another reason why it's attractive to investors is because it seems that contributions are not "lost," unlike with term life insurance where premiums are considered spent when the policy expires. But really, you would get the same effect--and pay even lower fees-- if you just get a vanilla mutual fund or UITF and a cheap term life policy. You might want to check out my past post about life insurance for more details.

***

Dear Investor Juan,

Chanced upon your blog, been browsing the net to know more about UITFs and mutual funds. Thank you for sharing, you have very informative posts :) Now I am very much keen to apply for an investment plan. By the way, regarding UITF, can I redeem anytime after the holding period?

Thanks,
Anne


Dear Anne,

You can redeem units any time after and even before the minimum holding period, actually. The only difference is that you'll be charged with an early redemption fee if you redeem before. So if liquidity is a big factor for you, you might want to consider the redemption fee and the minimum holding period in choosing a UITF.

7 Pillars of Financial Literacy, Explained (Part 1)

The "7 Pillars of Financial Literacy" that I presented in the last post is an integrative framework that provides an overview of my (and Project Be's) version of "financial literacy". It is meant to show the user the breadth and depth of the subject, and how subtopics are related to each other. Also, it is a tool that we can use to evaluate how much we already know about financial literacy, determine how much more we want to know, and formulate a strategy that will help fill identified knowledge gaps.

In this post, I will discuss each pillar in detail and articulate ideas that I will present in our "Training of Trainors" Financial Literacy Workshop this weekend.

1. Being "financially literate"

What is financial literacy and why do we have to be financially literate? Financial literacy is understanding the "language of money," not being an expert; you don't have to have an MBA, be a CFA, an economist, or an investment banker in order to be financially literate. Like it or not, money matters are a big part of everyday life; so the same way we have to know a bit of math, of history, of language, of art, of culture to be able to have a "good" quality of life, we also have to know a bit of finance--these are the stuff the world runs on.

In a more specific sense, financial literacy equips us to be able to make sound and informed economic decisions: it tells us how to identify available alternatives and how to objectively evaluate these alternatives to come up with a decision, given that outcomes depend not only on our decisions/actions but also things that are beyond our control. Finally, and most importantly, financial literacy helps us cope with and prepare for the fact that we don't know what's going to happen in the future.

2. Defining your financial goal

It's easy to know what you want--be a billionaire, be a rock star, "own a Jollibee," and so on--but getting what you want is another matter. To go from here to where (or what or who) you want to be, you fist need to do two things: know where you currently are and know exactly where you want to go.

It is important and necessary to breakdown your financial goal or dream into something that is--for lack of an equally appropriate but non-acronym term--SMART: Specific, Measurable, Attainable, Relevant, Time-bound. Reshaping your goal into something SMART does two things: it provides a way to know whether you have attained your goal or not and it better helps you figure out concrete steps that will take you to your goal. 

Knowing "where you are"--that is, your current financial status--is pretty straight forward. You get your "net worth" or "net wealth" by listing and valuing everything your own and subtracting how much you owe: if your net worth is positive and substantial, then you're off to a great start; if it's negative (i.e., if you're a net borrower), then you need to get out of that hole first before you can take the first step towards your financial goal. Then you measure your capacity to increase to your wealth--your "net earnings"--by taking your regular income and subtracting recurring expenses.

The SWOT tool which I discussed in a prior post is also useful in coming up with a plan to reach your financial goal.

3. Budgeting

I bet that a good majority of those who emerge from the second pillar will feel that they don't own enough and they don't earn enough. The best way to address both issues is to improve our capacity to accumulate wealth by boosting your income and controlling your expenses, which result in more savings.

It's also important to understand the reasons for saving, how it's not just something that we have to do, and that essentially it's just one of several ways to cope with uncertainty about the future (please read this post for more details).

4. Dealing with life's uncertainties

As I mentioned in item 1 above: one thing that makes financial literacy absolutely necessary is that we only have an unclear picture of what will happen in the future, and that some of the things that may happen can leave us in a worse financial position and take us farther from our financial goals. Accidents, sickness or death in the family, natural catastrophes, and higher costs of goods and services (such as weddings, honeymoons, tuition fees, houses, etc.) in the future are things that we have to prepare for financially.

There are three ways of preparing for these unforeseeable, substantial, and necessary future expenses: insurance, cash in the form of an emergency fund, and debt. Insurance is almost always the cheapest alternative because: 1) risk is pooled and the costs are shared among many parties; 2) we can use forms of insurance that are subsidized by the government. Cash has an implied cost (called opportunity cost) since we usually earn very little interest (if at all) on what we set aside for emergencies. Finally, we can always just borrow when we need the money, but often only at very high interest rates.

To be continued in Part 2.

SSS and PhilHealth for OFWs

Insurance was one of the things that I talked about on Day Two of Project Be's Financial Literacy Workshop. I explained the concept of insurance and how it may address the risk of monumental future losses and expenses, especially when savings are insufficient. When I asked the participants who among them had insurance, less than 10 of 50 raised their hands. But when I asked who had SSS (i.e., Social Security System) and/or PhilHealth (i.e., Philippine Health Insurance Corporation) coverage, almost all of them raised their hands.

While it was good to know that most domestic workers in Hong Kong, as represented by the workshop participants, are active members of SSS and PhilHealth, that they don't consider these government instruments as insurance is a bit disconcerting. As a matter of fact, these two instruments are types of social insurance--ways that the government manages risk for its citizens: SSS offers a specific flavor of cash value life insurance while PhilHealth provides basic health insurance coverage. It's also worrying that SSS and PhilHealth benefits are sometimes ignored and mostly left unused in the Philippines, perhaps because SSS and PhilHealth memberships are compulsory for those who are employed and some people consider premiums immaterial compared to their wages. But even as SSS and PhilHealth remain misunderstood and unappreciated, for a vast majority of Filipino workers living abroad--particularly those who have limited income and act as breadwinners for family members back in the Philippines--these two government-backed insurance instruments serve as their families' first line and cheapest source of protection against risk. In this post, I will briefly present some of the benefits of SSS and PhilHealth coverage and how OFWs all over the world can avail of these benefits.

SSS OFW Coverage Program

Who are covered under this program? New and previous OFW members not over 60 years old; coverage of takes effect upon payment of the first monthly contribution.

What are the benefits of an OFW member? For a maximum monthly premium of 1,560 pesos, OFWs are entitled to various benefits and loan privileges, provided qualifying conditions are met. In general, the greater the accumulated contributions, the greater the value of the benefits. Some of these benefits include:

• Sickness allowance of up to 54,000 pesos
• Maternity benefit of up to 39,000 pesos for a maximum of 4 deliveries/miscarriages
• Funeral benefit of 20,000 pesos
• Retirement/disability/death monthly pension of up to 2,400 pesos per month, paid in perpetuity, or a lump sum payment of total contributions plus interest
• Access to salary loan of up to 24,000 pesos, housing loan of up to 2 million pesos, and house repair and improvement loan of up to 1 million pesos

One advantage of SSS over comparable policies offered by private insurance companies is that failing to make a contribution--a real possibility since OFWs make voluntary (and not mandatory) contributions--does not invalidate the coverage, which is what happens if you miss payment for private insurance. It must be said, though, that missing an SSS contribution will temporarily make you ineligible for some benefits, although you can always make up for it in the future.

OFWs can avail of/apply for all benefits except housing and house improvement loans through 13 SSS international offices in Asia, the Middle East, and Europe.

For more information, please visit the SSS website, or contact the Foreign Branch Expansion and Monitoring Department of the SSS Head Office at 924 7844, 435 9814, or ofw@sss.gov.ph.

PhilHealth Overseas Workers Program

Who are qualified members? Active land-based (as opposed to "sea-based") OFWs who underwent the normal process of registration as an OFW at Philippine Overseas Employment Administration (POEA) Offices. OFWs who are currently abroad but are not yet registered with PhilHealth may also register under this category.

Who are qualified as dependents? As I mentioned, unlike private health insurance, dependents of PhilHealth members also enjoy benefits without additional premiums. Qualified dependents include:

• Legal spouse (non-member or whose membership is inactive)
• Child or children - legitimate, legitimated, acknowledged and illegitimate (as appearing in birth certificate) adopted or stepchild or stepchildren below 21 years of age, unmarried and unemployed.
• Child or children - 21 years old or above but suffering from congenital disability, either physical or mental, or any disability acquired that renders them totally dependent on the member for support.
• Parents (non-members or membership is inactive) who are 60 years old and above, including stepparents (biological parents already deceased) and adoptive parents (with adoption papers).

What are the benefits of membership? For an annual premium of 1,200 pesos (will be 2,400 pesos starting January 1, 2013), members and their dependents are entitled to the following benefits:

• Inpatient coverage - PhilHealth provides subsidy for room and board, drugs and medicines, laboratories, operating room and professional fees for confinements of not less than 24 hours.
• Outpatient coverage - day surgeries, dialysis and cancer treatment procedures such as chemotherapy and radiotherapy in accredited hospitals and free-standing clinics
• Special benefit packages for specific cases

For more information, please visit the PhilHealth Overseas Workers Program website.

Life Insurance

DEAR INVESTOR JUAN

Dear Investor Juan,

I am writing to you because I'm somewhat new to this financial literacy thing and I want to know if it is possible to know your two cents about life insurance? Almost all the articles I've read about financial literacy says that the first step is getting protection (life insurance) or maybe after budgeting and saving but before investing. I think you've already scratched the surface about this topic on some of your articles. And from what I understand, you prefer term over traditional and VUL or "buy term invest the difference". Lastly, maybe you could recommend a life insurance product here in the Philippines or what features to look for when getting a life insurance. Again, thank you for your time and God speed on your future endeavors.

Kind regards,

Aaron


Dear Aaron,

Most probably you have already read my introductory post several weeks ago about insurance, but for the benefit of those who haven't, I will start this post with a definition. In the simplest sense, insurance is a contract between two parties: one party, insurance company, promises to pay specified amounts to the other party, the policyholder, conditional on the occurrence of future events such as death, car accidents, or pirate attacks; in return, the policyholder, pays the insurance company insurance premiums for this transfer of risk to the latter. There are three major types of insurance that we all should be familiar with: life insurance, health insurance, and property and casualty insurance. I will limit my discussion to life insurance in this post and just talk about the other types in future posts.

Life insurance, as the name suggests, insures against death: the life insurance company pays the beneficiary of the life insurance policy in the event of the death of the insured. Life insurance doesn't benefit the policyholder personally, but rather his or her dependents. So in a sense, life insurance would be more important to those with families and other dependents than to those who are single with no dependents.

There are two primary types of life insurance: term life and cash value life insurance. Term insurance is the simplest type: you pay the premium for the amount of coverage that you want (i.e., the number of years and for what amount) and lose coverage when your policy lapses and you choose not to renew. You don't "earn" anything with term life so it does not have any cash or investment value (which isn't saying it does not have any value).

The other class of insurance--cash value or permanent life insurance--is generally a combination of term life insurance and an investment product that has a cash or investment value. Usually, policyholders have an option to withdraw from this value, borrow against it (i.e., use it as collateral for a loan), or just let in mature and receive a "bullet" payment or a schedule of payments.

We can also classify cash value life insurance even further, based on whether the cash value is guaranteed or variable and whether the required premium is fixed or flexible. The four combinations and their general characteristics are presented in the table below.

	Guaranteed Cash Value	Variable Cash Value
Fixed Premium	Whole life insurance - Guaranteed build up of cash value	Variable life insurance - Policyholders are allowed to allocate their premiums among several investment accounts
Flexible Premium	Universal life insurance - Greater separation between term insurance and investment components - Premium payments are flexible, but there is a minimum initial premium	Variable universal life insurance - Same as variable life but premiums are flexible

Everything looks dandy. So why do I advise against cash value insurance?

In general, I recommend just buying term life and investing on your own for two main reasons:

1. You lose flexibility and liquidity with cash value life. Back in the day when there was just term life insurance, people would buy it for several years, not die, realize that they're just losing money, and eventually cancel the policy. So in the 1800's some guy named Henry Baldwin Hyde came up with cash value life insurance to prevent people from cancelling their policies (since with cash value life, you lose your investment if you cancel too early). With the term life + DIY investment option, you can cash out on the investment part any time you want, even at little or no expense.

2. Cash life policies cost too much. Why? Because you pay someone to do something you can do yourself, arguably better, for much less.

So there. If you think you need it, then buy term life. Investing is a different decision altogether, and in general you'll be better off doing it on your own than getting cash value life. In choosing among insurance companies, I would make a decision based on cost (because term life is basically a commodity--it's the same thing regardless of who it comes from) and reputation.

I hope I was able to sufficiently answer your questions. Good luck!

Revisiting that Real-World Exam-Type Problem

DEAR INVESTOR JUAN

Dear Investor Juan,

I hope that my e-mail finds you well and patient for yet another question.

I have been a little concerned with the knowledge that my insurance plan is now owned by another insurance company, Philfirst. From my point of view, it just shows how fickle insurance companies are... Because of this, I have read several articles on how to check if your insurance company is stable. 
First, they say, is to check with the insurance regulation commission, next is to check for financial ratings and financial statements,then listen for current news about the insurance company and then watch stock trends.

Most of these things are foreign to me. I don't know how to get those information or maybe what to make of it once I see it. The farthest I could go was to check that Phil first is indeed listed in the government insurance site. But what assurance can that give me (as you said) that the company would still be in business after 10 years?

I understand that this may be a decision I have to make for myself. I do not want to end up being another "CAP" victim and yet I also do not want to over worry myself for nothing. Would it be too much to ask if you give me your personal opinion about the matter i.e., what would you do if you were in my shoes?

I am not financially savvy as you may have well guessed from my emails but I just want to find a better way to know if my insurance company will still be there when my plan matures. I understand no one can guarantee an answer but isn't there a way to make a good guess, at the least?

Respectfully yours,
Anonymous


Dear Anonymous,

Hello again! Let's try to take a look at and think about things without having to bother with financial statements and all that boring stuff.

First, I don't think the offer (to retire your investment early) signals any trouble on the side of the new owners, as that comment of one of our readers seems to suggest: what it essentially is is the company's attempt to pare down its future obligations in an above-board manner as it tries to generate new sales from the purchase. Out of, say, thousands of policy holders, I'm pretty sure that more than a few will find the offer attractive enough to bite, especially since a lot of us still take the time value of money for granted or don't know how to apply it to situations outside the classroom. It's a strategy that is meant to boost the firm's value, and even if only a small proportion of plan holders accept the offer, it's a strategy that will have worked. In fact, since the offer actually decreases the risk that the firm will not be able to meet its future obligations, it actually works in favor of those who do not accept it.

Second, you would have to form an opinion about the new owners, namely Philfirst and STI. STI is more familiar to most of us: it has a solid business model which generates a lot of cash, although admittedly the computer and nursing education businesses are not as glittery as they once were. Philfirst, I'm not very familiar with, and less so the firm's controlling figure, Mr. Eusebio H. Tanco. The information on the group's website, though--assuming everything is true--should be able to allay some of your concerns. The group is supposedly awash in cash, and a big part of it is in a trust that no errant manager could be able to put his or her hands on. All this means that in terms of capacity to meet future obligations, Philplans seems to have enough to erase (at least some of) your worries.

Finally, I think it's unlikely that Philplans will be another CAP. First, while like CAP, Philplans is also in the pre-need educational plan business, unlike CAP (as far as I know), it's also into life insurance and HMOs. And unlike pre-need educational plans, where policy holders are certain to collect at a particular future date, risk is better spread in the life insurance and HMO businesses, which makes them more lucrative and less risky to both the insurer and policyholders. So even if, for whatever reason, Philplan's pre-need educational business tanks, life and HMO should be able to generate enough business to stem the bleeding of the company as a whole. Essentially, being diversified into revenue streams or businesses that are not perfectly correlated lessens the risk exposure of Philplans which customers would also benefit from.

Well, I guess that's the best I can do short of actually performing due diligence. Just to make myself clear, my personal opinion is that you reject the offer and stick with your plan.

Good luck, and I hope to hear from you again.

The Deal With Insurance

PERSONAL FINANCE 101

     Cat did not understand. "They pay him gold and silver, but he only gives them writing. Are they stupid?"
     "A few, mayhaps. Most are simply cautious. Some think to cozen him. He is not a man easily cozened, however."
     "But what is he selling them?"
     "He is writing each a binder. If their ships are lost in a storm or taken by pirates, he promises to pay them the value of the vessel and all its contents."
     "Is it some kind of wager?"
     "Of a sort. A wager every captain hopes to lose."

George R.R. Martin

A Dance with Dragons

What is he selling them, Cat asks? Well, insurance, of course.

Albert Einstein was quoted as saying that insurance is one of the most important innovations of modern history. Insurance makes it possible for us to live in this chaotic world, amid all the natural and man-made volatility and unpredictability. Insurance protects people from natural disasters, families from a burning house or the death of the breadwinner, individuals from car accidents or unforeseen hospital expenses, and even ship captains from storms or pirate attacks.

In the passage above, Martin correctly describes insurance as a wager or bet for both the individual who wants to be insured--the captain--and the person or organization (e.g., an insurance company) that sells insurance--the insurer. To understand how, let's take a look at the situation below.

Let's say a captain in Martin's story, let's call him Daario, owns a ship with precious cargo and is set to sail across the Narrow Sea and back for six months. The Narrow Sea is known for its violent waters and bloodthirsty pirates; while Daario does not consider himself to be a coward, he nonetheless recognizes that the threat of losing his ship and its precious cargo is real. A nameless man--the insurer--offers to pay Daario the value of his ship and its cargo--around one hundred thousand gold dragons--if it gets lost in a storm or taken by pirates within a six month window, at the low, low price of fifty gold dragons--the insurance premium. Say, Daario estimates that the probability of his ship getting lost in a storm or taken by pirates is one in one thousand, should he buy the offered insurance or not?

In other words, Daario faces the following choices:

To not buy insurance, which has the following consequences:

• a 1 in 1,000 (0.1%) chance that he will lose 100,000 gold dragons
• a 999 in 1,000 (99.9%) chance that nothing will happen

To buy insurance, in which case Daario will lose 50 gold dragons for certain for the insurance premium

If you were in Daario's shoes, what would you do? For many of us, 50 gold dragons (or Philippine pesos or US dollars, if you prefer) would be a small price to pay to prevent a possible monumental loss--be it your ship, your house, your husband's earning power, and so on--no matter how remote that possibility is. We would not hesitate to pay a certain amount just to avoid risk.

How about the insurer? Things don't look quite so good from his end, do they? Surely, in the 1 in 1,000 chance that Daario loses his ship, the insurer will be wiped out since the 50 gold dragons he receives from the captain is far from enough to cover his obligation. This is where the true beauty of insurance comes to light, when we look at things from the other side of the fence. Most definitely, Daario won't be the only captain who would be willing to buy insurance from the nameless man. When individuals or organizations with independent or low-correlated risk (like say, how a person dying from cancer does not increase the likelihood that another person will die from the same disease; or how a fire in a slum area in Quezon City is unlikely to result in another fire in Makati) buy insurance, risk is pooled and the total risk for the whole group is reduced. Therefore, as more ship captains buy insurance, the insurance provider is able to collect enough premiums to cover possible losses at any given time. This is how insurance companies make money. 

That's the end of it. In many instances, insurance is the simplest and cheapest way to manage risk, and we all should have it in one form or another. However, if you're interested in the math of how insurance is able to pool and reduce risk, read on. 

***

(WARNING: Elementary statistics involved!) Let's say n captains buy insurance from the nameless insurer and that the probability that a captain will lose his ship is p. If the possibility that a captain will lose his ship is independent of other similar occurrences, then the probability that x out of n ships will be lost, P(x), is said to follow a binomial distribution; the mean percentage or proportion of ships that will be lost is always equal to p, but the standard deviation of the proportion, a measure of how much the proportion can move away from the mean, is the square root of p*(1 - p)/n. With these formulas, we see that as more captains buy insurance from the insurer--as n increases--the mean proportion of lost ships will be constant but the standard deviation of the proportion--a practical proxy for risk--decreases.

Filipinos Poor Financial Planners -- Study

IN THE NEWS from Business World Online -

According to a study by financial services firm Sun Life of Canada (Phils.), Inc., Filipinos are poor financial planners, with only one in 10 able to leave something to their families when they die. Sunlife’s Study of Lifestyle, Attitudes and Relationships or SOLAR also showed that only 2% of Filipinos have saved enough for retirement, with 45% becoming dependent on relatives and 30% on charity. Meanwhile, 22% continue to work after retirement.

This is a pretty scary finding, one we would do well to heed and take notice. While some of us may not feel too obliged to save a little something for those we will eventually leave behind, preparing for our retirement is simply a must; we can think of it as the most important reason why we should take control of our finances now. When we retire, most of us will have limited periodic income (mostly from pension payments) and inflated expenses (mostly going to health care). In general, the best way to prepare for retirement would be to make sure that you have access to a substantial amount of ready, liquid capital and/or that you have the right kind of insurance. What this means exactly and how it can be done will be the topic of future posts.