Choosing your beneficiaries is a major decision.
When you buy life insurance in the Philippines, they are among the things asked from you. You will need to give a name or list of people to be part of your policy.
At first, you would think they’re simply a part of the process in getting a life cover. Later on, they will play a crucial role.
What is a beneficiary
Quite simply, a beneficiary is a person who would receive the proceeds of a life insurance policy.
That means, they will receive a sum of money from your insurance company in case you pass away.
Why is it important to choose your beneficiaries carefully? Remember, there is nothing you can do once you’re gone.
Whatever is in your policy will be followed. If you have not left any sort of instruction, then it will be up to the insurer or even, in some cases, the court to decide.
Hence, take the time to really think about who you should select as a beneficiary. If you are having troubling determining your beneficiary, the following (and the law) might help you.
First let’s answer two questions:
- Who can become a beneficiary?
- Who cannot become a beneficiary?
Who can become a beneficiary?
There is a short and a long answer to this question.
The short answer is that anyone who will suffer a hardship or loss when you pass away can be a beneficiary.
People surrounding you come easily to mind. For example, are you married? Then choose your legal or soon-to-be spouse to give both of you peace of mind.
Do you have kids? Add your children to the list.
Are your parents dependent on you financially? As a breadwinner, are you responsible in sending your siblings to school? Include your family.
You can even select any relative (cousin, aunt, uncle, etc) of your choosing, but with exceptions.
And this leads us to the long answer, which explains the exceptions.
In Section 10 of the Republic Act No. 10607, also known as the Insurance Code of the Philippines, is stated, “Every person has an insurable interest in the life and health:
- Of himself, of his spouse and of his children;
- Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;
- Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and
- Of any person upon whose life any estate or interest vested in him depends.
The meaning of insurable interest in life insurance is actually already partly defined above. It is present when someone receives some sort of benefits while you are alive, has more interest with you alive and well, and will be vulnerable to hardship or suffer loss when you are gone.
In summary, here’s a quick rundown.
- You have an insurable interest of your own life.
- Any person related by blood or by virtue of marriage.
- Where there is financial loss when you’re gone.
- A lender on the life of the borrower.
Who cannot become a beneficiary
There are also people who are not allowed to be a beneficiary.
For instance, Section 12 of the Insurance Code says, “The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured.”
Also, Article 2012 of the Civil Code of the Philippines says, “Any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him, according to said article.”
Upon checking, Article 739 states, “The following donations shall be void:
- Those made between persons who were guilty of adultery or concubinage at the time of the donation;
- Those made between persons found guilty of the same criminal offense, in consideration thereof;
- Those made to a public officer or his wife, descendants and ascendants, by reason of his office.
Primary and secondary beneficiaries
Once you have narrowed down your list, you are then given the choice to either make them primary or secondary beneficiaries.
When a person is designated as primary beneficiary, he or she will receive the sum insured. On the other hand, the secondary beneficiary will only receive the death benefit when all primary beneficiaries pass away.
But why is there a need to have these options?
To better understand this, it’s crucial that we remember one thing. The purpose of a life cover is to make sure that your family gets paid first.
However, we never know what life throws our way. A primary beneficiary might pass away before the person insured, leaving the policy without any beneficiary.
When there is no beneficiary, the death benefit will form part of your estate. When that happens, your debts and other liabilities get paid before your family. A secondary (also called contingent) beneficiary prevents such a situation to happen.
Revocable and irrevocable beneficiaries
One other thing you might want to think about is to consider somebody as your revocable or irrevocable beneficiary.
An irrevocable beneficiary is someone who shares the right in managing your insurance. On the other hand, a revocable beneficiary does not enjoy such right.
To better understand this, let’s say you made your spouse as your irrevocable beneficiary.
You will not be able to make any change to your policy without him or her agreeing to it. You will be asked to get his or her signature before the insurance company will act on your request. A simple update such adding or removing a beneficiary will need his or her sign-off.
All of this might sound a bit limiting. There is, however, a huge advantage.
Under the Philippine laws, your irrevocable beneficiary will no longer be asked to pay tax when receiving the death benefit. He or she will be given whatever is the sum insured stated in your contract.
On the other hand, the revocable beneficiary is, quite plainly, someone who will be given the death benefit. Nothing else. He or she doesn’t have any right in managing the policy. Also, the amount he or she may receive may be taxed.
Who should you declare as an irrevocable beneficiary?
When declaring someone as your irrevocable beneficiary, think of a person who would have your best interest.
If you are married, it is common practice to declare your husband or wife as irrevocable beneficiary. In this way, he or she has a role in managing your policy. Plus, he or she enjoys the tax advantage.
If you are single and you are paying for your parent’s life cover, making yourself the irrevocable beneficiary makes sense. This can be a strategy especially when he or she relies on you financially. Should you be burdened with hospital and funeral bills on his or her passing, you can use the death benefit to pay the bills.