Dollar-denominated policies are marketed with a quiet appeal: the dollar tends to feel stable. A benefit in dollars sounds solid.
It can be a reasonable choice for some people, such as families with real dollar needs. But there's one piece of arithmetic that people should see before they sign.
The mismatch to understand
Your premiums and your benefit are in dollars. Your life, your rent, tuition and groceries are in pesos.
That means two things can happen, and you have little control over either:
- If the peso weakens against the dollar, the dollar benefit buys more pesos. This works in your favor on the payout, but your premiums, converted from pesos, also cost more.
- If the peso strengthens, the reverse: a smaller peso benefit and cheaper peso premiums.
Both directions are possible. Exchange rates move for reasons no one can forecast reliably, including the people selling you the policy.
Who it suits
A dollar policy often makes sense where your commitments are already in dollars:
- Someone earning in dollars (an OFW paid in foreign currency, or a remote worker with a foreign employer).
- A family with dollar expenses ahead, such as overseas tuition.
- A person who deliberately wants some of their protection outside the peso.
It makes less sense for a household whose income and bills are entirely in pesos and who is simply attracted by the idea that dollars are safer.
The practical questions
1. Where does my income come from? If it's pesos, the premium is a currency risk on top of the insurance risk. 2. Can I carry the premium if the exchange rate moves against me? Test it with a worse rate than today's. 3. What conversion rate applies at payout? Ask how and when it's calculated. 4. Are there conversion charges each time a premium is paid? 5. What would happen to my plan if I couldn't afford it in two years?
An exercise
Take your premium in dollars and convert it at today's rate. Then convert it at a rate noticeably weaker for the peso. If the second figure would strain your budget, the policy is carrying more risk than its brochure admits.
My view
Currency is a legitimate reason to choose a dollar policy, and a poor reason if it's the only one. Protection is meant to be dull. If a product adds an exchange-rate bet to something that should be simple, make sure that's a decision you made on purpose.
Ask for the numbers in pesos. A good advisor will show them without being asked.
The free Life Ready Checklist at lifereadywithvenus.com has a page for writing these down, free and with no sign-up.
