A life insurance policy is one of the most useful tools of estate planning.
This always happens
It is a common story: a wife whose husband died of an illness needs to access conjugal funds kept in a joint bank account under their names. The bank is aware of the husband’s death, and will not let the grieving widow withdraw funds from the account to pay for her husband’s hospitalization and funeral expenses. It requires her to first submit proof of payment of estate tax.
We all know people with the same story, but few prepare for it.
Accessing the bank account
Until recently, banks would freeze your accounts if you died. This was so whether you owned the account by yourself or if you had shared a joint account with another person—even if the other person was your spouse. You could have asked for authorization from the BIR to withdraw up to Php20,000.00; but you still had to submit a certification of payment of estate taxes before being allowed to access the rest of the funds.
The TRAIN Law, or R.A. 10963, made it easier for the heirs to access funds in the account. The heirs just have to pay a final withholding tax of 6% of any withdrawal.
But what if your heirs have no money to pay the tax? What if they spent it all on your medical expenses?
Life Insurance for liquidity
A life insurance policy is one of the most important gifts you can leave your loved ones. At a time when they need funds the most, it could provide them the liquidity to pay for the expenses related to your death. More importantly, it could supplement their income, especially if you were their main family provider.
To exempt the life insurance proceeds from the estate tax, make sure that the designation of your beneficiaries is irrevocable. Otherwise, the life insurance proceeds would be considered part of your gross estate at the time of your death, and would still be subject to estate tax.
Why is it important to make your beneficiary irrevocable?
If you designate someone as your irrevocable beneficiary, you are turning over certain rights to the policy to him/her. In doing so, you are ensuring that the policy will no longer be considered as part of your taxable gross estate at the time of your death. You would then save your heirs from payment of additional estate tax.
But this also means that you will lose some control over your life insurance policy. Should you decide to change your beneficiary, you would have to get the irrevocable beneficiary’s consent first. Hence, it is important to be sure of the person you’re naming as irrevocable beneficiary; otherwise, you may have trouble changing your beneficiary down the line.
Apart from being exempt from estate tax, the proceeds from your life insurance policy could also be used to pay for expenses related to the settlement of your estate.
Life Insurance can help with settlement of the estate
The law requires your heirs to pay estate taxes within 1 year from the time of your death. Before this, they have to make an inventory of all the properties that you left, gather all titles, certificates, deeds, and other papers, engage the services of an accountant, a lawyer, and/or an appraiser, determine the names and other details of all your heirs. In case the available cash of the estate is insufficient to pay the estate tax due, they can ask to pay it in installments within 2 years from your death.
If real properties are involved, they would also have to pay for local transfer taxes, publication fees, and other charges. If they miss the deadlines for payment of these taxes, they would have to pay surcharges and other penalties.
Settling an estate could be costly and time-consuming. Worse, differences among your heirs could delay the process further. (Which is why it is also practical to leave a will that is compliant with the law in both form and substance.)
All these things they have to do while grappling with the loss of a loved one.
Obtaining a life insurance policy with proceeds sufficient to pay for costs related to your death and for settling your estate helps ensure that you will leave your heirs not with a burden but with a legacy.
(Finance doesn’t have to be intimidating. Personal finance is simply managing your money, minimizing your expenses, and finding out ways to increase your net worth. In this blog, I explore some concepts of personal finance and hope to give you a better idea about how to budget your money and, eventually, make your money work for you.)
Joanna Orbe-Dizon is a partner at PM Dizon Law and financial advisor at AXA Philippines. You may reach her at firstname.lastname@example.org