In my years in the financial industry, I have noticed many clients have been given mismatched products in relation to their needs. This may be because the client was given not too well informed advice, or the vendor did not know (or did not care to know) the financial status of the client, or the client was taken in (in the vernacular, nasilawan) by the returns promised that s/he didn't read the fine print: returns not guaranteed, paying period could be a lifetime, or the risks are all your own, among others.
Let's tackle the factors listed above.
It may seem like a basic premise, asking a client why they met with a financial adviser in the first place. But in an effort to make more sales, some bank employees or insurance agents end up being product pushers - even if the client has no need for the particular product being shoved face first.
This is why financial education is important. Similar to Maslow's hierarchy of needs, in financial circles we also have a guide in order to help a client better assess and understand what financial needs are more imperative to achieve first, before moving on to the next level.
The lowest level of this guide is ensuring you have enough cash and liquidity for your emergency and daily needs. This safety net is an amount that should equal around 3 to 6 months worth of salaries. Notice the qualifiers "emergency" and "daily", which means it can cover both expected expenses (like your weekly grocery shopping) and the unexpected events (like a car needing massive repair from a car accident).
The next level would be protection - ensuring that those who are dependent on your income for survival will be taken care of should the breadwinner be taken out of the picture. I come from a Chinese family that had serious (cultural) reservations about ever mentioning death, so I understand clients who find it an unpleasant topic, but the more you put off this discussion, the more it becomes difficult to manage financial affairs if the breadwinner dies.
There will be burial or cremation related expenses, final medical and hospital bills to deal with, estate taxes on properties left behind, and the specter of "how will we earn for our daily needs" has to be answered at that moment, because life goes on for those left behind despite a horrible loss.
Investments form the last level, and these are purposely relegated last, because they should be entertained only if you have excess funds to do so. The simplest reason I can give for this is because investments, by definition, are never guaranteed. As part of one's financial portfolio, these should be funds you are prepared to lose and write off should the investment not perform to expectation. Yes, there are ways to manage risks (like diversification), but it will never be absent and an investor will have to take that as part and parcel of the investing world.
Therefore, if all you have in your bank account is 20,000 pesos, using it all in buying the equivalent amount of shares in a mutual fund would be unwise as it leaves you with nothing for the first two needs. I mention this specifically because I have met clients who eschew saving for emergencies or insurance, but whose eyes light up the moment the word "investment" is bandied around and are ready to "go all-in," to use gambling parlance, rather fittingly.
Number of Dependents
If there are people who are depending on your income for their survival or needs, then you have a dependent. This relationship is easiest to understand in a parent-child relationship. Every need the child has - food, shelter, clothing, transportation, tuition fees, school uniforms and supplies, all of these are supposed to be provided by the parent who is the breadwinner of the family.
It stands to reason that the child will be financially distraught if the parent dies and the source of income is discontinued. If the spouse is a housewife or househusband, then this will mean a drastic change in occupation, from homemaker to a member of the working force. (And which raises new questions, like who will now bring the children to school? Who will take care of the daily chores since no one will be available during the day to do them? How will the surviving parent now fetch the child from school, whose classes end at 2 PM, when work hours end at 5:30 PM?)
Having insurance will alleviate many of these valid concerns. The surviving spouse will have ready funds for immediate needs like the bills that come like clockwork, and do not stop just because the breadwinner has passed on. S/he may also hire a yaya (nanny) or tagaluto (cook) to help with the chores. Most importantly, having ready funds buys time for the remaining parent to look for a job, which we all know is one thing that is not easy to come by.
(Image from moneychoice.org)
In the insurance industry, it is quite often more difficult to introduce the concept of insurance to single people, seeing as they do not have immediate dependents. The reason "no need" is true - at first glance. However, with people living longer these days, a new demographic has come up: parents who depend on a single child's income. Since one or both parents are now retired, if they haven't saved for their retirement, a child is often culturally obligated to foot the bill, so to speak, lest a melodramatic scene with the line "pinag-aral ka namin sa mabuting eskwelahan!" (we sent you to good schools) should come to pass.
Adding to that cultural pressure, single people are often "tapped" into being benefactors of their siblings who are married but unable to provide adequately for their own families, having 5 or 6 kids to boot. I have clients who come to me, complaining that their sister would "guilt" them by saying "napaka-selfish mo naman, tulungan mo naman kami sa gastusin, wala ka namang pamilya, eh!" (you are so selfish, come on, you have to help us with our expenses, it's not like you have a family of your own) and having a financial burden they didn't even sign up for.
A newer concern for single people is who will take care of them when they get a major disease, like a heart attack or stroke. Being without the traditional support of a family, they will have to rely on fending for themselves - and true enough, I have clients who come to me specifically for this purpose: health insurance, which ensures they will have a ready fund should a catastrophic illness strike. We have made advances in treating illnesses like cancer, that they are already seen as surmountable nowadays, but at the end of the day, you need funds to avail of them.
Whether you are married with kids, married without kids, single with kids, or single by choice, it seems inevitable that you will have dependents. It would be prudent to prepare for it while you still can.
I will discuss the last three factors mentioned above in my next post. Having been in this field for a number of years, I can say that even when armed with sound financial information, people tend to procrastinate on acting on it. Reading materials can only do so much - the will to act will come from you.