How much is enough for a death benefit?

DO people exactly know how much they really need when they pass on? In reality, people make assumptions as to how much they need and want to leave behind. Taboo as it sounds—this is not a casual topic among average Filipino families—but this is something the next generation should be kept informed about.

In the life insurance industry, a sum assured is also the death benefit of a life insurance contract. Unfortunately, in our country, the life insurance penetration is still quite low. Thus, life insurance literacy is low as well. There are times when a policy is bought just because a relative or a close friend offered the program and they feel a sense of obligation to return a favor.

The question is: Can somebody decide on how much he or she need for a death benefit? Yes, of course, but by way of considering the known factors: income replacement; educational support if there are minor children; final hospitalization fees; and, finally possible cost of funeral.

However, things are still unknown, such as when a person will pass on and how. Morbid as it sounds but the realities of life sometimes hit us on the face right before it happens.

A client of mine recently asked how much “Sum Assured” he must have to make sure that his family will be fully supported in the next ten years even without him. We started to define how much is he willing to support every month even without his presence and he said, at least P60,000 or P720,000 a year. By factoring the average inflation of 5 percent every year, that is roughly P9.057 million.

There are a lot of life insurance policies that are cash flow friendly to achieve this goal depending on the age of the life insured and depending on the life insurance product to use. Sometimes, it may be overwhelming but it is still better to prepare something than nothing at all.

There is also another strategy called perpetual support. That is, you decide on the amount you want your heirs to receive every year divided by the interest rate. As for the interest rate, let us assume that it will be the same as a time deposit because upon receipt of the death benefit, the reality is that the heirs would not know just yet how they are going to budget the proceeds of the life insurance policy as the final expenses can be overwhelming.

As an example, taking the annual expense of P720,000, divide it by 2 percent, assuming it will be placed on a time deposit, that is P36 million. No wonder some Filipinos would try their luck in the lottery for the hope to support their families perpetually.

Another strategy is taking the example above: the P720,000 per year but factoring in your resources such as income from business, royalties, pension, company insurance benefit, and other passive income that could possibly continue even without your presence. After deducting all the resources, that is the time to compute for a life insurance cover.

By this approach, the life insurance requirement will be lesser and as an example is a previous client of mine who has a rental property income of P40,000 every month, so using the example above, the target monthly support is P60,000 per month, minus the P40,000 every month rental income and the amount to augment is only P20,000.

Using the life insurance income replacement strategy, and also factoring in the inflation of five percent every year (5 percent), the heirs can be covered for ten years by a life insurance proceeds of roughly P3.02 million.

As difficult as it may seem, it is going to be easy once you decide to sit down and study how you want your heirs’ life be. Also, seeking an advise from a Registered Financial Planner will always help.

Can you take away the grieving once you are gone? Of course not, oftentimes people just learn how to live with the grieving but it will help with their moving forward if they will not burden themselves as where to get the money to pay their last respect to a loved one who did not prepare anything at all.

After all, the life insurance death benefit is something to be discussed always with your life insurance agent, by then peace of mind is perpetual.

Jendee de Guzman is a registered financial planner of RFP Philippines. To learn more about personal-financial planning, attend the 97th RFP program this August 2022. To inquire, e-mail info@rfp.ph or text at 0917-6248110.