Life Insurance: One of the Best Tool in Estate Planning (by Atty. Angelo Cabrera)

There are only two things that are certain in life – death, and taxes.

In this video, Atty. Angelo Cabrera pointed out great topics that are prevalent in today’s market.

Let’s get down with some basics and understand what Estate Taxes and Estate Planning are.

What is Estate Tax?

Upon death of an individual, all his properties should be transferred to the heirs (sa mga tagapagmana). That will only possible after payment of a transfer tax called estate taxes.

Estate taxes are unavoidable, thus, it’s necessary to plan for it.

This leads us to the second term.

What is Estate Planning?

Estate Planning is the act of proactively seeing (and foreseeing) the requirements and the needs in the transfer of assets should a property owner dies. Through estate planning we will be able to prepare what is bound to happen anyway (though timing is still uncertain) without having our loved ones worry about where to get the money to pay off estate taxes.

Disadvantage of Donation and Incorporation as way of avoiding estate taxes

In this video, Atty. Cabrera raised the usual practices of many in avoiding estate taxes and pointed out that Life Insurance is one of the best way to plan for our estate. In particular, he mentioned the disadvantages of the following for the sake of trying to avoid estate taxes.

1) Donating properties to the heirs while we are alive.

This premature transfer may destroy the character of our children because of instead of relying on their own God-given abilities to produce their own wealth, they no longer have to since they got the wealth from us.

2) Incorporation

This will push the children in a co-ownership regime that might lead them to a conflict situation, or inequitable situation where one ends up domineering and controlling while the other children/heirs suffer in silence.

As a result, many of the properties that are co-owned are left idle or uproductive.

Life Insurance and Estate Taxes

He also advised to load up as much life insurance possible until we’re still insurable. Insurability has the following considerations:

1) Age
2) Health
3) Financial Capacity

The Value of Investing in Life Insurance

Here’s an interview with Registered Financial Planner, Marvin Germo, at UNTV discussing the value of Life Insurance.

Discussion Summary

Marvin Germo really made this conversation with life insurance very interesting. One, because he talked about it in a very lively manner, and because he made everything sound so simple.

Here’s a recap of the key points discussed in this video.

Ano nga ba ang Life Insurance?

Lahat ng bagay ay may risk – risk na masiraan ng sasakyan, masunugan ng bahay, na tayo ay magkasakit, or mamatay ng maaga ang isang breadwinner ng pamilya.

Kailangan natin ng Life Insurance para protektahan ang mga taong umaasa sa isang breadwinner sa risk na mawala ng maaga ang tao kung saan sila nakadepende.

What will encourage people to buy life insurance?

Maraming misconception tungkol sa life insurance. Maraming nagsasabi na “Hindi pa naman ako mamamatay”, anjan din ang dahilang “Ibang tao naman ang makikinabang jan”.

According to Registered Financial Planner Marvin Germo, ang pagkuha ng life insurance ay pagiging responsable – paraan ng paghahanda na dahil hindi natin alam ang mangyayari sa hinaharap, we are ensuring that our family is well taken care of.

Ang life insurance ay tumatayong safety net para siguraduhing may aasahan ang ating pamilya mawala man ng maaga ang breadwinner ng pamilya.

Pwede bang mama-claim sa Life Insurance kahit buhay pa?

Ang mga benepisyo ng life insurance ngayon ay hindi lamang kapag namatay tayo, kundi may mga benepisyo na pwede natin makuha kahit tayo ay buhay pa.

Meron dalawang problema na ina-address ang life insurance:

– We die too soon
– We live too long

Maaari natin gamitin ang Life Insurance upang mapaghandaan ang ating Retirement or Education ng ating mga anak.

Get Life Insurance while you are still young

Mas mura ang life insurance habang mas bata pa tayo.

Bukod doon, ang life insurance ay isa sa mga bagay na dapat natin kuhanin habang di pa natin ito kailangan, dahil kapag kailangan na natin ito, maaaring di na tayo makakakuha pa.

Do I Really Need to Purchase Life Insurance if I Already Have That Benefit From My Employer?

Most Filipinos in the working class are employees. And since a very common benefit from employers are life insurance and health cards (HMOs), the need to purchase a separate individual life insurance is no longer necessary, right?

Besides, if one already own a car, why does he need another one? That’s luxury! So if I already have a life insurance policy from my employer, why would I need another one?

WRONG.

Let’s put it this way (oh I love metaphors!).

Does having a job necessarily say we have enough resources to sustain our lifestyle?

Not necessarily. Few questions needed to be answered. First, how much do we earn? Second, how much do we spend? Third, how far do you want to go with life?

Or say you have one set of clothing (shirt, undergarment, pants, etc…). Does having a set means you have enough? Obviously not since you needed to be “covered” for the rest of the week.

For both comparison, answering the question “How much do we need or how long do I need it” is very crucial before we can say we have enough.

Life Insurance is not different, and definitely investments (but let’s reserve that on a different conversation).

Understanding the Need

Life insurance plays different vital roles in the way we plan our finances. We have to understand that the question is not if we have life insurance, the question is how much coverage do we have.

Let’s take a look of the most common uses of life insurance to help identify whether what your company provides is enough.

Life Insurance for Income Replacement

Alright, before you leave this page after reading yet another financial jargon, allow me to explain what this alien term means.

Income Replacement generally refers to the ability of life insurance to provide income to the family during an untimely death of the family’s breadwinner. Life insurance “replaces” the lost income of the breadwinner caused by an untimely death..

Now, say your company gives you P500,000 life insurance benefit, will that amount continue to feed your family, pay the bills, bring your children to school, and shoulder their lifestyle in the next say 5 or 10 years.

If you answer no (and I’m sure you will), then adding up more life insurance coverage is necessary.

Shouldering the Cost of Death

Everyone is different, we have different lifestyles, different views in life, different likes and dislikes, and a very long list of things we do differently.

There are two life experience that we are 100% sure that we share – we were born, and someday, at our own time, we will face death.

For people who are in the stage wherein they are still building their wealth, life insurance provides a safety net to ensure that an untimely death will not compromise the journey to financial independence of the family left behind.

Simply put, we take responsibility to fund the costs relating to our own death (morbid, I know, but it’s one thing we should openly talk about). Let us not be a burden to anybody else.

Now, does your P500,000 life insurance coverage from your employer would suffice the cost of death? Well, studies say it could take around 1M to 1.5M to cover the cost of death in the Philippines.

Protecting the fruits of your Hard Work – Your Assets

There’s one scary thing about dying with too many assets named after us. We call these horror Estate Taxes (Alright! I might be exaggerating too much).

When a person dies, all the assets/properties he have accumulated over his lifetime will be frozen by BIR until appropriate taxes are paid be the heirs. We refer to these taxes as Estate Tax.

“Frozen” means your heirs won’t be able to access your bank accounts, investments, and real estate properties. Without having the ability to access your assets, how could they be able to pay the Estate Tax?

That’s where life insurance comes in.

Using the same example, is your P500,000 life insurance coverage provided by your employer enough to pay the estate tax? Let’s put it this way, if you have successfully built your wealth through your lifetime and have accumulated P20,000,000 worth of assets (savings, investments, and real estate), P500,000.00 is not enough.

At most, you’ll be needing P4,000,000 life insurance coverage.

Add the fact that your life insurance coverage from your employer usually does not extend after retirement.

Now, is having life insurance benefit from your employer enough?

Given the above considerations, it’s not in most cases.

Having a life insurance benefit in your company doesn’t necessarily mean you have enough. You are dressed today, but not for the rest of the week.

Remember that the question is not if you have life insurance. The question is how much life insurance coverage do you have.

In the next articles, let’s talk about how to compute the ideal life insurance coverage that you should have in order to have a solid financial plan.

Can An OFW Apply For A Philippine Life Insurance While Abroad?

No.

Few weeks ago, I received an email from an OFW asking for assistance regarding an insurance policy signed abroad. She found out (just recently) that insurance application signed outside the Philippines is not valid.

So, I took action by referring her to an advisor of that company.

Clarissa Ramos, a financial advisor with a similar experience, have posted in Facebook the same, but with a detailed guideline on how she assisted the policyholder.

This could help you, dear OFWs, if you are in a similar situation.

Let me share you this post from Pinoy Insurance Talk.

https://www.facebook.com/lifeinsurancehubph/posts/1653226394909286

To every Filipino who signed their insurance applications and proposals abroad, this is an actual story for you.

A client asked for my help. He wants to know the status of his insurance policy. He learned from Pinoy Insurance Talk Facebook group that signing insurance applications and proposals abroad is prohibited and any insurance policy born out of such is void. Also, that when an insurance policy is void, his family may not be able to claim anything. He got anxious and thought:

1. What will happen if I die during the contestability period? We can never be sure nothing will happen.
2. How about after the 2-year contestability period? Will my family be able to claim this time?

He confronted his agent about it. His agent only offered excuses. He contemplated of inquiring about the matter himself, but his agent told him that he will fix it. Trusting his agent, he did not inquire. However, his agent never did. He decided to do something because he did not want to always be left wondering whether or not his family will be able to claim. He wanted to file a report.

I helped him by drafting his complaint which contained all the relevant facts he narrated to me. I told him all the evidence he needed to prepare to establish the facts we stated in the letter. The good thing about the evidence preparation was that he was able to provide everything I asked that we would possibly need. Finally, I taught him where to go to, who are the people he needed to talk to and how to inquire.

He arrived yesterday from abroad and went to the office of the Insurance Company today to air his concern. Here are the following things he learned:

1. Indeed, the insurance policy is VOID, not just voidable.

Void means that a contract is invalid and has no force or legal effect – it never existed in the first place. Voidable means that a contract is valid and has force or legal effect BUT can later on be declared as invalid.

Why is an insurance policy – the basis of which are insurance applications and proposals signed abroad – void?

Under Article 1409 of the Civil Code, one of the void and inexistent contracts is where it is expressly prohibited or declared void by law. Insurance agents and companies here in the Philippines are prohibited from selling insurance abroad because the license issued to them is good only within the Philippines. Thus, it follows that there cannot be an insurance policy born out from solicitations made by insurance agents and companies abroad.

2. Even if the years pass by, the company will NOT PAY the benefits.

Under Article 1410 of the Civil Code, the action or defence for the declaration of the non-existence of a contract does not prescribe. This means that the insurance company can claim that the contract is void at anytime, if indeed it is void. There is no time limit for the company to raise that. The contract being void, the company can refuse to pay the benefits under the premise that they have no obligation. Do note that in void contracts, the parties cannot be compelled to fulfil their obligations because the very source of those duties are inexistent.

Something to remember: The rules on contestability period only applies to valid and voidable insurance policies.
The Insurance Company told the client that it was a good thing he reported and that he had two options:

1. If he wanted to keep his policy, he can request for a letter of acceptance from Insurance Company which will be heard and decided by a Committee.
2. If he wants nothing to do with his policy anymore, he can request for a cancellation of the policy and refund of all the premiums he paid.

That being said, I encourage everyone to come forward and do what the client did. Do not let your family suffer in the future.

In relation to this issue, I have found this article from Rappler. Let us all be aware so we can really enjoy the peace of mind that we have bought.

You Are Young and Don’t Have Any Dependent: Why Should You Get Life Insurance?

Yes, perhaps this is you…

You are probably starting in your career, and at this stage, you already know that you have to take control of your finances (a proof is that you are actually reading this article).

Congratulations to that!

You’ve got your emergency funds covered, but now you’re confused. Will you go straight to investing, or will you get life insurance first?

It is very crucial to address this bugging question.

Considering you are young with nobody relying on your income but you, why would you ever need life insurance?

“I’ll just invest the money instead of buying life insurance!” This, perhaps, is the voice in your head.

Why Need Life Insurance, Anyway!?

life insurance for yuppies

First and the major reason is about taking responsibility of our own lives.

In most situations, our lives are often interconnected with one another. Especially for us Filipinos who take pride in our family-oriented outlook.

Our actions and inactions particularly about money could directly or indirectly affect our parents and/or our siblings, and sometimes, even our relatives’ lives.

Whenever a member of the family is in a dire need, everyone is usually there, offering moral and financial support. That’s how we love our families.

But that feeds a cycle of a never ending loop, leaving everyone struggling on their finances – while they themselves are financially challenge, they won’t think twice to provide financial support to any family member who badly needs it.

This cycle should stop.

Untimely death should not burden the families left behind. That burden will surely slow down their own journey to financial independence, well, unless you belong to the ultra rich families.

But most of us are on the middle. And nobody wants to be a burden to anybody, either dead or alive.

The second reason is about planning ahead. Since life insurance increase costs as we age, getting one while we are young (and able) is a practical reason.

Life insurance is one of those things in life that you buy but you don’t want to use. Those things that you can’t buy whenever you needed them the most.

Conclusions and Recommendations

As a yuppie, if you have already saved a good amount of money that would cover the costs of “untimely death”, then perhaps you really don’t need insurance.

How much do you need saved up? Well, this article could give you an overview of how much.

The truth is, most yuppies that enters the marketplace does not really have much – given it’s the stage in our lives wherein we are just starting to accumulate assets.

You may be able to afford sustaining your own personal needs, and perhaps consider yourself independent – living on your own income. But, when inevitable events comes up – sickness, loss of job, etc.., the tendency of asking help from parents and siblings aren’t that very far.

Emergency funds, life insurance, health insurance, and your investments would help you cover those inevitable events. Only by then wherein you can proudly say that you are really taking responsibility of your own life.

Why Life Insurance is an Indispensable Part of Financial Planning

We all (most of us) know the mechanics of how life insurance works. You buy it, when you die, you get money.

Simple, isn’t it?

But what’s not a common knowledge is the vast uses of Life Insurance as a great tool of not only planning our own finances, but also, in protecting whatever we had gained over our lifetime.

Let’s talk about them.

Why Insurance is an Indespensible tool

1) Taking responsibility of one’s own life.

I’ve read blogs discouraging single yuppies in getting life insurance, which I think (on my personal opinion) is quite careless and irresponsible.

For one, we should stop the idea that somebody will carry the burden during an untimely death. This thought will keep this country poor.

As much as we can, let’s take responsibility on our needs when we are alive, and try not to pass the burden when we die.

How much does a yuppy who supports nobody need to stack in his life insurance? One good reference point is this article of Pesos and Sense about the cost of dying in the Philippines.

2) Ensuring that life will continue for those left behind.

Head of the family, parents supporting a family, and persons where other people (young or old) depends on. These people needs more life insurance than just by taking responsibility of their own life.

This is mostly referred to as Income Replacement.

Income, what?!?

Alright, here’s the main concept. The moment a breadwinner of the family faces death, it’s not only a loss of the physical body, it’s also a loss of income generated by that individual.

It’s computed by several means. One way is to divide the annual income provided by the breadwinner by an acceptable investment rate of return.

Let’s say the breadwinner is giving P500,000.00 to the family, and an acceptable investment rate of return is 5%.

That will be P500,000.00 divided by 5%, which will result to P10,000,000.00.

That will be the ideal insurance coverage for income replacement, which, once received by the beneficiaries, will be invested in an investment that would yield the acceptable investment rate of return (5%).

At the end of the day, what’s important is that when we say we love our family, death should not end that love.

3) Ensuring debts will not be inherited.

Ever wonder why life insurance is required when getting a Housing Loan?

Yes, creditors use Life Insurance as a sort of a collateral to ensure that debts will be paid, dead or alive.

This is referred to as Mortgage Redemption Insurance (MRI).

4) Keeping your asset, well, yours (or to your heirs)

I’ve heard an interesting statement from somewhere, just can’t remember where.

It says, “If you are purchasing an asset, especially real estate, you should stack up an additional life insurance coverage equivalent to 20% of the Market Value of that asset. Remember that everytime you purchase an asset, you are giving a burden to your heirs/family, 20% of the market value as an estate tax when you die.”

That brings up the topic of estate taxes, which should be seriously considered when an individual is slowly building up his wealth.

Life insurance ensures that cash will be readily available to beneficiaries to pay for the corresponding estate taxes.

Any case, who would want that the fruit of their lifetime hardwork falls only to the hands of the government, auctioned in a very steep discount, just to pay for the taxes?

No one.

5) Leaving a legacy

Perhaps not the best use for Life Insurance, but nevertheless, some people use life insurance as a way to leave instant wealth to their family.

Well, for a fraction of a cost, life insurance proceeds could leave millions to the heirs.

Conclusion

Life insurance is indeed an indispensable tool in our financial planning, and should not be taken lightly. It is very useful in various stages of our lives.

To learn about different life insurance options, it’s best to talk to an insurance/financial advisor. You may request a FREE quote here, our network of Financial Advisors will be keeping in touch with you.