Let’s face it, the ordinary person does not believe in buying life insurance. To them, buying life insurance is like taking a step backwards because it is just an expense with no perceived immediate benefits. As some had complained to me, “Bayad ako nang bayad pero wala namang nangyayari. (I keep on paying but nothing happens.)” I jokingly reply that, “Bakit, gusto mo bang may mangyari pagkatapos mong magbayad? (Why, do you want something to happen as soon as you pay?)”
Yet when I ask my training participants to recall how much premiums they had readily paid for their house or car, they would say in the tens of thousands of Pesos yearly. This is where I ask them why they are more ready to pay for non-life insurance than life insurance when, clearly life is the more valuable asset.
One can look at insurance premiums as part of the expense in owning and maintaining an asset, life included. But here’s a different take on the matter.
Consider a business that owns an expensive building. At the start of each year, that business will buy fire and lightning or non-life insurance to cover the building. And because the non-life insurance premium for an expensive building will also be expensive, the business will not book the premium as an expense right away. The initial accounting entries would be to debit prepaid insurance and credit cash (assuming the non-life insurance was paid for in cash).
In accounting, to debit prepaid insurance means to consider the insurance premium as an asset. Then typically on a monthly basis, the business will book 1/12 of the non-life insurance premium as debit insurance expense and credit the amount as prepaid insurance. As the months of that firm’s fiscal year pass by, these repeated bookings will slowly reduce the value of the prepaid insurance until nothing is left by the time the non-life insurance expires at the end of the fiscal year and new non-life insurance is purchased for the following fiscal year.
Now let us look at life insurance itself. If we were to follow the foregoing accounting practice, when would ordinary life insurance expire? The answer, provided there are no lapses in policy premiums, is when the covered life itself expires. This simply means that for the duration of the life insurance policy, the policy premiums can be booked as part of the asset of the insured.
And while the premiums will be booked as an expense at the end of life, they will be immediately reversed because of the proceeds from the life insurance policy. Therefore, life insurance can hardly be considered an expense. In fact, I look at life insurance as a gift that one acquires for his loved ones. But while he is alive, the gift remains with him as his asset.
So next time a life insurance agent approaches you, consider what he or she is offering as a gift of an asset that you can initially own and eventually leave behind for your loved ones. And it is a very powerful gift at that because it can help you throw away your worries about the future.
As master Oogway said in the movie Kung Fu Panda,
“There is a saying: yesterday is history, tomorrow is a mystery, but today is a gift. That is why it is called the present.”
(Originally written by Efren Ll. Cruz, RFP at http://www.savingstips.com.ph)
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