The risk of dying too young or too old

Last week, the Philippines lost two well-respected businessmen—JG Summit’s John Gokongwei Jr. and PAL Holdings’ Lucio “Bong” Tan Jr. While Gokongwei died at a ripe age of 93 years old, Tan was still very young at only 53 years old.

Their death reminded me of a risk that everyone faces—either dying too young or dying too old.

If someone dies young, like Bong Tan, he will most likely leave behind a family with young children. His family will lose a major source of income. There is also a possibility that his family will be left with substantial debts, such as the mortgage on their home. This would mean a great deal of suffering, emotionally and financially, for those left behind.

If someone dies old, like Gokongwei, his expenses prior to his death will most likely be big because of medical expenses that come with age. As a result, the risk of outliving his savings and becoming a burden to his children increases.

Although nobody knows when he will die, these problems can be addressed by buying insurance and investing diligently.

If someone dies young, having insurance means his family will get a death benefit, allowing them to pay any remaining debts. The insurance proceeds should also allow them to cover their financial needs, at least until they can find a way to supplement the income that was lost because of his death.

When buying insurance, it is better to buy term insurance instead of whole life insurance. Both pay death benefits in case of death. However, for the same amount insured, the premium on term insurance is less than whole life insurance.

The latter seems more attractive since you get a survival benefit equal to the sum insured if nothing happens by the time the policy matures. With term insurance, you will only be insured for a short period. If the policy matures and nothing happens, there will be no survival benefit and you will get nothing.

To address this concern, you can use the savings from buying term insurance to invest in other investment vehicles like the stock market. For example, if you want to be insured for P1 million and your insurance broker said the premium for a whole life insurance is P20,000 while the premium for a term insurance is only P5,000. Instead of getting the whole life insurance for P20,000, get the term insurance for P5,000 and invest the difference of P15,000 in the stock market. If you do this over the next 40 years and the average return of the stock market is 8 percent, your P15,000 annual savings will become P3.8 million, or more than the P1 million survival benefit of the whole life insurance. Even if the average return of the stock market drops to 4 percent, you will still have P1.4 million after 40 years.

By buying term and investing the difference, you also address the problem of dying too old since you will have a bigger retirement portfolio, which should last for a longer period. However, nothing should stop you from increasing the size of your investments beyond the difference between term and whole life insurance premiums. You should set aside at 20 percent of your income for investments. Also consider investing in assets that generate passive income to cover some of your financial needs as you grow old.

Instead of investing the difference, you may also choose to increase the size of the sum insured. After all, expenses are constantly going up and P1 million in the future will buy much less than P1 million today.

Finally, buy insurance and start investing as early a possible. Insurance is much cheaper when you are young because you are healthier, and the risk of death is much lower. By investing earlier, you maximize the power of compounding, allowing you to have a much larger savings portfolio by the time you grow old compared to someone who invests the same amount but starts later in life.

Once you address the financial risks that could arise from dying too young or dying too old, you can now focus your attention on improving your health and the quality of life, which is much more meaningful.