BULL MARKET, BULL SHEET By Wilson Lee Flores
(This is worth reading guys. Keep reading here. Credit to Wilson Lee Flores for these.)
Not everyone should be an entrepreneur, but all must save money & insure
BULL MARKET, BULL SHEET
By Wilson Lee Flores Updated May 18, 2009 12:00 AM
He that has a penny in his purse, is worth a penny: Have and you shall be esteemed. — Petronius
Interest works night and day in fair weather and in foul. — Henry Ward Beecher
Make all you can, save all you can, give all you can. — John Wesley
Not all people should be or are destined to be entrepreneurs, but I strongly believe that all of us — professionals, housewives, entrepreneurs, overseas Filipino workers and students — should develop the habit of saving money through traditional bank deposits, real estate investments (if local realty prices go down this year, this would be the ideal time for the public to invest in real estate) or life insurance.
PLDT/Smart boss Manuel “Manny” Pangilinan is one inspiring example of a non-entrepreneur whose exceptional hard work, professional excellence and lifelong savings ethic have turned him into a self-made billionaire. Another example of a non-entrepreneur who’s now mega-rich is hardworking and disciplined boxer Manny Pacquiao; hope he and his mom Aling Dionisia learn to save their big bucks so as not to become a future Mike Tyson or Michael Jackson. By the way, is Manny Pacquiao adequately insured?
Everyone can be a millionaire via lifelong savings and hard work. Comedian Vic Sotto, who’s the new host of TV5’s Who Wants to be a Millionaire game show, told me he “saved” his earnings in the early 1980s by buying a P2.2 million house in Valle Verde 5, Pasig City, on terms. I told Vic that his strategy paid off and that house is at least a thousand percent higher in value now if we just conservatively valued it at P22 million.
Due to the numerous questions sent by readers to this writer via e-mail or on Facebook (please continue e-mailing), plus the positive feedback on our earlier “Question & Answer” series with the Philippines’ largest and oldest homegrown life insurance giant, Insular Life, The Philippine STAR and Insular Life again partnered for another series to help enlighten the public about life insurance.
Congratulations to Insular Life on their 2008 net income of P 2.1 billion and revenues of P12.4 billion, which amazingly defied the global recession. Next year is their 100th-anniversary celebration, a testament to their staying power and great success.
And many thanks to the top executives of Insular Life for supporting our advocacy to promote a national culture of savings in the Philippines through this Q&A series, and for agreeing to answer all your questions. Here they are:
I am Jimmy Thai, CEO of the Primer Group-Uniglobe Travelware Co., which owns the Travel Club and retails North Face, Kickers, Samsonite and Sledgers in the Philippines. Your series on life insurance and the importance of savings is very interesting. Here are some of my questions. Thank you.
1. Do I need life insurance when I religiously, on a periodical basis, contribute to an earning fund?
Jimmy, you should be commended for having the discipline to regularly contribute part of your income to an earning fund. This will surely help you achieve financial security and independence. I believe, however, that life insurance is still necessary for the uncertainties and risks of life. All of us can accumulate enough money for our needs if we save regularly, make the right investment choices, and, most of all, have sufficient time to amass and preserve wealth. But what if that time is disrupted by circumstances beyond our control? Common-sense risk management makes us realize that we should have life insurance for the financial protection of our families so our plans will continue. After all, dreams don’t have to die when people do. Life insurance enables widows to continue sending their children to school, provides funds to set up an income-generating business when the breadwinner is no longer around, and pays for retirement and medical needs in old age. And if you have both — money saved and invested to earn as well as sufficient life insurance coverage for income protection — your total assets are worth so much more whether time is sufficient or proves to be short.
Jesus Alfonso G. Hofileña
Executive Vice President & Head
Sales & Marketing Group
2. Considering the current debacle of America’s AIG, what is my assurance that the insurance policy I take out today will be worth the amount promised when the time of need comes?
To answer this question sensibly, some reality check is needed. The current economic crisis has revealed there is no such thing as a perfect guarantee. Bigness and lineage no longer count for much, especially when even sovereign nations (e.g., Iceland) could become bankrupt due to flawed economic policies and unsound investments. At the end of the day, one should realize that choosing a good insurance carrier should be based on the following: quality of the company’s assets, capitalization, prudent management, good governance and investment practices including transparency and disclosure, proper product pricing, efficiency of business operations, and record of benefit payments. Having a strong balance sheet must not be interpreted as simply having the highest asset values. Rather, one must examine as well the liability and capital values as well. Product pricing assumptions drive the liabilities while capital usage and deployment dictate solvency margins, business expansion and future business direction. At Insular Life, we pride ourselves on our conservative business practices which have served us well for almost 100 years now.
Wilfredo M. Llanto
Senior Vice President & Head
Finance & Investment Group
What happened to AIG was truly disturbing, if not tragic. From media disclosures and analysts we have learned that the principal cause of AIG’s financial misfortune was its extremely large exposure to Credit Default Swaps (CDS) — a very sophisticated and specialized product that made AIG financially liable for the defaults of sub-prime mortgage loans. In the Philippines there is no such product. Moreover, the Philippine Insurance Commission has publicly declared that no insurance company here has any exposure to the toxic investment instruments found in the US. Thus, our situation here is completely different from that prevailing today in the United States. Having said that, let me add that there may be no absolute guarantees in life (just like no one expected the financial meltdown to happen to the most powerful economy in the world), but that should never stop us from acquiring financial security for ourselves and our loved ones. I have always believed that life insurance is essential to my family’s welfare simply because we live in a world of unavoidable risks and I can never know what may happen to me tomorrow.
Jesus Alfonso G. Hofileña
3. Bank deposits are insured by the PDIC to the extent of P500,000 per account. Are insurance payments also insured to the same extent? Assuming an insurance company collapses, what is my assurance that I can at least get my money back?
Generally speaking, if any company goes out of business, its creditors have a right to claim against the assets of the company. In the 33 years thus far I have been in the life insurance business, this has not yet happened. Our insurance industry is properly regulated and there are many safeguards protecting the interests of policyholders, such as your concern. If it does happen, the Insurance Commission will oversee an orderly and equitable distribution of the assets of a failed insurer, and will certainly give due importance as well as priority to insurance policy claims. But insurance companies do engage in sound business practices to manage their financial risks. For example, a lot of policies are reinsured once the coverage reaches a certain amount. Reinsurance is the practice of spreading the financial risk by letting other insurers have a portion of the coverage. Finally, whatever principles are observed by the PDIC to provide deposit insurance coverage are also the same principles used by other insurance companies. If you are confident therefore that the PDIC will not fail in its obligations, you should likewise grant the same sense of comfort to the rest of the insurance industry.
Jesus Alfonso G. Hofileña
4. How do I compute the costs of various insurance schemes available in the market, e.g., pay life, endowment, or term?
The cost of any insurance product is normally presented per thousand of coverage. You can simply ask the company of the agent what is the premium rate per thousand of the product you are interested in, multiply that by the amount of coverage you want (in thousands), add the policy charges and you will know the cost. All these can usually be found in a premium rate book or table for the product. In general, term insurance policies would have the lowest cost because they are designed to provide only death benefits. Whole life policies come next because they also provide cash values and other non-forfeiture benefits. Whole life policies come in two types: one is payable continuously for life, while the other is payable over a limited period of only, like, five, 10 or 20 years. Limited whole life policy premiums would be higher than continuous payment whole life policies, because you end up completing the payments sooner. Finally, endowment policies would be the highest-priced because they have protection as well as living benefits. They pay if something happens to you and will also pay the coverage amount if nothing happens until the policy matures. Request your agent to show you all these computations. You can also call us and we can not only discuss costs, but, more importantly, the overall value of our different products as well as the cost-benefit assessment for each of them.
Jesus Alfonso G. Hofileña
5. Am I protected against inflation by investing in a life insurance policy?
Inflation erodes purchasing power. Given this premise, life insurance purchased years ago that seemed sufficient then may no longer be adequate to answer one’s needs, current or future. Hence, life insurance coverage is good protection against inflation if it is periodically reviewed and upgraded. The aim is to ensure that its maturity value would be sufficient to answer for one’s future needs.
Vera Victoria C. Morales
Assistant Vice President & Deputy Head,
Investment Management Staff
6. Will there be premium adjustments in the event of extraordinary economic events like hyperinflation?
Once an individual policy has been issued, the premiums payable on that policy shall be as indicated in the policy. Thus, for policies already issued and in force, there will be no premium adjustments in the event of extra-ordinary economic events.
Mona Lisa B. De La Cruz Senior Vice President, Chief Actuary & Head,
Administrative Operations Group
7. How do I choose an insurance company? Will I have to go through financial statements? How can the ordinary layman, who may not know how to read financial statements, gauge financial soundness and stability?
Please refer to our reply to question No. 2 above. Reading the financial statements will not be enough to guide a layman’s decision. Assuming a short list of equally good insurance companies is arrived at, one should still consider the following factors: fitness of the product’s benefits to his needs, reasonable investment returns, and policyholder dividend payments that lower the cost of insurance coverage. You may ask for this information from your insurance agent or directly from the insurance company. Because of space limitations, we cannot fully discuss all factors that should guide your decision making. We would be happy to give you further information if you write to us at firstname.lastname@example.org.
Wilfredo M. Llanto
I am Jose “Pepe” Rodriguez from Instituto Cervantes, a Spanish journalist. How can life insurance companies and society as a whole make the need for life insurance protection more widely accepted, popular and affordable to the ordinary people?
I believe nothing less than a collaborative effort by insurance companies, the industry, government and socio-civic groups would be needed to, first and foremost, make the citizenry aware of the value and need for life insurance for their financial security. Surely the insurance companies and industry would have to take the lead in this information and financial education campaign. Government also plays a big role in promoting discipline and consciousness in personal money management through the school system in the country, among others, or by offering incentives like tax benefits for people to insure. As more and more Filipinos get insured, this will enable insurance companies not only to develop more products but also more affordable ones.
Jesus Alfonso G. Hofileña
I’m Ruben Bangayan, a businessman here in Davao City who always reads The Philippine STAR. How stable is the life insurance industry in the Philippines now, especially in relation to the US crisis and global recession?
Insurance Commissioner Atty. Eduardo Malinis has publicly declared that Philippine life insurance companies have no exposure to the toxic securities that caused the downfall and financial woes of prominent US financial institutions, including AIG, because life insurers operating in the Philippines are not allowed to make overseas investments. Moreover, under pertinent laws and regulations governing the conduct of business of insurance companies here, there are very stringent requirements even for local investments. Insurance companies invest mostly in fixed-income government securities whose yields surpass the interest rates assumed in the pricing of their products. Moreover, being long-term instruments, their values have not been eroded because they can be held until maturity. As for capitalization, insurance companies are mandated to continuously increase their capital in order to ensure their capability to meet future obligations. Presently the minimum paid-up capital for insurance companies stands at P75 million, with annual tests for risk-based capital adequacy performed by the Insurance Commission. You can always check with the Insurance Commission (IC) directly on the financial worthiness of insurance firms or view published statements and annual reports in the IC website.
Jesus Alfonso G. Hofileña