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October 6, 2018

Life Insurance as Estate Planning Tool

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When people hear about estate planning, we would think about 2 things: death and wealth. That is true because basically, estate planning is the act of preparing for the transfer of a person’s wealth and assets after his or her death.

We have to understand that death has financial consequences and they are the following:

  1. Household Expenses
  2. Medical expenses
  3. Existing debts and mortgage obligations
  4. Funeral Expenses
  5. Estate Taxes and local transfer Tax
  6. Estate Settlement and Legal Fees

Now, nobody really wants to talk about death. But reality is, we are all going to die; we just don’t know when. Hence, it is important to prepare for these expenses because our family or loved ones will pay for these when we are already gone.

Otherwise, because of lack or inadequate planning, these common problems can arise:

  • Unsettled and unutilized estate
  • Shrinkage of the estate – since Taxes and expenses eat up the state
  • Quarrels and strained relations among family members
  • Unpaid and Accumulating Estate tax liabilities

Estate planning can avoid these dilemmas. It includes preparing for the estate taxes that your heirs will have to pay to effect the transfer of all your properties to them.The estate tax is a type of “death tax” and it is imposed on all your assets: cash in bank, land, building, owned business, investments, etc.

After the Tax Reform for Acceleration and Inclusion (TRAIN) Law, the estate tax rat is now a flat  6 percent imposed on your estate worth or net estate. Therefore, if you have a net estate of P10M, the total estate tax your family needs to pay is P600k.

The payment and filing of the Estate Tax Return must be made within six months from the decedent’s death. If your heirs fail to do these, there will be further interests and surcharges on tax due. Consequently, the properties may not be transferred to the heirs  without proof of payment of estate taxes.

I’m sure you don’t want your estate wishes to remain unfulfilled. What can you do to prepare for estate taxes?

One of the important tools used in Estate Planning is a Life Insurancepolicy.

Life Insurance creates an Instate Estate

Wala ka bang maipa-pamana sa pamilya mo? With a life insurance policy, you have an instant estate to give to your heirs upon your demise.

Life Insurance can provide your family instant 1 million pesos which they can use to sustain their living or support their financial needs; yet you only paid for a small premium for this coverage. Yes, the amount of benefit is usually bigger than the premiums paid.

Life insurance provides Immediate Cash

Your family will no longer have to worry about paying for burial expenses, debts or mortgage, final medical expenses, other settlement costs. A life insurance policy can help your family prevent the possibility of a forced sale of assets to generate needed cash.

Life Insurance can take care of Estate Taxes

The proceeds from a life insurance are generally tax-free especially if beneficiaries are declared as irrevocable. Therefore, a life insurance policy can be used to pay for estate taxes upon the death of the insured. It can help you leave your wealth intact and not reduced by tax.

Sample Life Insurance coverage

Product: Maxilink Prime (Variable Universal Life Insurance)

Term: 10 years to pay

Insurance Coverage: Php 10 Million

Annual Premium: Php 446,450 (based on 45 yr old Male, non-smoker)

Total Payment in 10 years: Php 4.47 Million

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Aside from the life coverage of Php 10 Million, a Variable Universal Life(VUL) policy provides investment fund value which is projected to be Php 9.5 Million at age 65 of the insured. With the life insurance policy, the estate or amount left to heirs is greater by Php 19 Million.

Considering to deduct the premiums paid by the deceased of Php 4.47 Million still results to a greater net benefit if the deceased has a life insurance coverage.

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Life Insurance is a very viable and sensible tool for Estate planning. A policy will provide the funds needed for the family and heirs to continue with their lives and preserve the estate of the deceased.

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