Why life insurance is a good estate planning tool

By Randell Tiongson on May 7th, 2024

Using life insurance as an estate planning tool in the Philippines is highly advantageous for several compelling reasons:

1. Estate Liquidity

One of the primary benefits of life insurance in estate planning is providing liquidity at the time of the policyholder’s death. When a person passes away, their estate might include assets like real estate, businesses, or stocks, which are not immediately liquid. Settling estate taxes and other related costs such as funeral expenses, debts, and legal fees may require cash, which might not be readily available. Life insurance proceeds can provide the necessary funds to cover these expenses without the need to hastily sell off assets, often at a lower value.

2. Estate Tax Settlement

In the Philippines, estate taxes must be settled within six months from the date of death, which can be a tight window if the assets are largely non-liquid. The tax rate as per Philippine tax law is 6% of the net estate value exceeding PHP 200,000. Life insurance can ensure that heirs have the funds available to pay these taxes and other incidental expenses without financial strain or the need to acquire loans.

3. Wealth Replacement

Life insurance can serve as a means to replace wealth consumed by taxes or debts upon the death of the estate owner. For example, if significant estate value is used to settle debts, taxes, or other obligations, the insurance proceeds can replenish this, ensuring that the beneficiaries still receive their intended inheritance.

4. Equalization among Heirs

In families where assets like businesses or real estate cannot be easily divided, life insurance offers a way to equalize the distribution among heirs. For instance, one child might inherit the family business while another could receive the equivalent value through life insurance proceeds. This approach helps maintain fairness in distributing assets according to the owner’s wishes.

5. Speed and Ease of Distribution

Life insurance proceeds are typically paid out quickly and directly to the named beneficiaries upon the policyholder’s death, bypassing the often lengthy probate process. This immediate access to funds can be crucial for families needing urgent financial support during such a difficult time.

6. Protection Against Creditors

In the Philippines, life insurance proceeds are generally protected from the claims of the policyholder’s creditors as long as the beneficiaries are stipulated in the policy. This protection ensures that the death benefit goes directly to the intended beneficiaries rather than being used to settle outstanding debts.

7. Continued Support for Dependents

Life insurance guarantees that dependents will have financial support after the policyholder’s death, which is crucial for families where the policyholder was the primary or sole breadwinner. This can be especially important in the Philippines, where extended family support is common, and financial responsibilities often stretch to include not just immediate family but also extended relatives.

8. Flexibility in Planning

Life insurance products can be tailored to fit various needs and goals within an estate plan, including increasing the death benefit over time to keep pace with growing assets and inflation, or integrating with various investment options for wealth accumulation.

Incorporating life insurance into estate planning in the Philippines offers numerous benefits that address both practical and strategic financial needs. It ensures liquidity, facilitates equitable asset distribution, provides creditor protection, and secures financial support for the deceased’s beneficiaries, all while simplifying the process of transferring wealth to the next generation. As such, life insurance remains a crucial component of comprehensive estate planning.

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Why life insurance is a good estate planning tool