Life Insurance: What You Need to Know?

Life insurance is a great financial planning tool. It mainly provides you with the opportunity of protecting your family from personal risk exposures especially after death. It is also used for wealth preservation and estate tax planning. However, it should never be thought of as savings vehicle.

Your need for life insurance depends on your personal circumstances like income, savings etc. You have to ask yourself:
  • Do I need life insurance? If you are single with no dependents, it may not be worth the expense; however, it will still depend on your goals.
  • How much do I need? When deciding how much coverage is necessary, you have to layout the details of what you have versus your goals.
  • What type of policy makes sense for me? Whether term, whole life or VUL. (To be discussed in another blog)
Some other considerations that you should know about life insurance before buying it are:

Beneficiaries
Assignment of beneficiary designations may be primary or contingent. Primary beneficiary is the person who is first entitled to the proceeds while contingent beneficiary is the person who would be entitled with the proceeds if the primary beneficiary or beneficiaries are dead or unable to receive the proceeds. 

Beneficiary designations can be deemed revocable or irrevocable. Revocable if the policy owner can change the beneficiary designation anytime without the beneficiary's consent. For an irrevocable designation, the beneficiary's consent is needed before the policy owner changes his/her beneficiary.

Tax Treatment
Death benefit proceeds may be tax-free or taxable depending on the beneficiary's designation. It will be tax-free if the beneficiary's designation is irrevocable (NIRC Sec.85E) or it will subject to estate tax if revocable. 

Standard Provisions (Insurance Code of the Philippines)
Sec. 50. Any rider, clause, warranty or endorsement purporting to be part of the contract of insurance and which is pasted or attached to said policy is not binding on the insured unless the descriptive title or name of the rider, clause, warranty or endorsement is also mentioned and written on the policy.

Sec.180-A. The insurer of a life insurance contract shall be liable in case of suicides only when it is committed after the policy has been in force for a period of two years from the date of its issue or of its last reinstatement. Provided, however, that suicide committed in the state of insanity shall be compensated regardless of the date of commission.

Sec. 242. The proceeds of a life insurance policy shall be paid immediately upon maturity of the policy unless such proceeds are made payable in installments or as annuity. In case a policy is maturing by the death of the insured, proceeds shall be paid within 60 days after presentation of claim and filing of the proof of death of the insured. Refusal or failure to pay the claim within the time prescribed will entitle the beneficiary to collect interest on the proceeds unless such failure or refusal to pay is based on the ground that the claim is fraudulent.

So before you start buying an insurance, make sure that you understood the purpose why you need to have one and have asked yourself whether you really need it or not. Think of it as an IRF - Income Replacement Fund (Chinkee Tan).

Sources: Investopedia, Insurance Code










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