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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
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. There’s
It might come as a surprise, but you are your first beneficiary of your life. This can happen in the following scenarios:
- voluntary surrender
- involuntary surrender
- payor for parent’s insurance
These riders are usually paid out when you are still alive. The hospitalization benefit for example pays a certain sum for each day you are in the hospital. So is critical illness, which pays on a diagnosis of a serious illness.
Voluntary surrender. For a whole life policy or variable universal life (VUL), you can also become the beneficiary either voluntarily or involuntarily. You can choose to surrender your policy in exchange for the cash value. A cash value is an amount of money that gets accumulated through the years. The longer the policy remains in effect, the higher its value becomes.
Should you wish to surrender your policy, you will get whatever cash value that you have accumulated. The result is that your life will no longer be insured and the policy is terminated.
Involuntary surrender. And again, with whole life insurance, your policy will be terminated when you reach the age of 100. In this case, the insurer will no longer cover your life. In return, they will give you an amount equal to the sum insured.
Payor for your parent’s insurance. Lastly, if you have purchased a life insurance for your parent and you are paying it, make yourself as the irrevocable beneficiary.
This is especially true if your parent is dependent on you. You can use the proceeds to pay if they figure in any emergencies or would unexpectedly die.
2. Your spouse
If you are married or about to be wed, your spouse/spouse-to-be will be the one person in the world that will feel the singular pain and suffering of your passing.
Not only that, if you are the breadwinner, he or she will struggle financially from your passing.
Hence, it makes sense to make him or her either the sole or one of several beneficiaries in the contract. In fact, that’s one of the purposes of getting an insurance: protect your loved ones, especially your spouse. That’s why when you are about to or already married, your insurance need increases.
If you got kids together, all the more reason to make him or her included in your life cover. When you pass away, your spouse would be more likely to be the only breadwinner for your children.
3. Your children
If you have children, there is no question that you should make them your beneficiaries. This makes sense whether you are a single parent, married with kids, estranged from your spouse, or a widow/widower. When you are gone, they will be vulnerable to hardship.
In your absence, they will be at the mercy of family, friends, or strangers.
However, remember that your kids will not receive the death benefit. They will have to wait until they reach the age of 18. Alternatively, the surviving parent or a guardian can legally manage the proceeds of the policy on their behalf as a trustee.
4. Your parents and siblings
You can also list your parents and siblings as your beneficiaries.
This is especially true if they are financially dependent on you. As the breadwinner in the family, they rely on you for their daily needs, bills, education, and even during unforeseen emergencies.
By taking out a life insurance policy, you ensure that they can live reasonably when you’re gone.
The death benefit that they may receive can cushion the impact of your passing on their way of living.
At the same time, they would also have less worries during emergencies involving you. Because you are covered for an untimely death, they can be freed from the burden of paying for any hospital and mortuary bills.
That’s why we can say that, indeed, you are not buying an insurance. You are buying peace of mind for yourself and for your family.
5. Your extended family
Your extended family can be your beneficiaries too.
If your aunts/uncles, cousins, nieces/nephews, grandparents or grandchildren are dependent on your income, then they can be one.
Bear in mind that, at times, your insurer might ask you additional requirement such as a written statement as due diligence.
6. Your lender
You can assign your life cover to your lender. This is applicable if you borrowed a huge sum of money or you are paying your mortgage for your asset, such as a house or real estate property. It is done through MRI or mortgage redemption insurance.
Technically, your lender is not a beneficiary. Instead, they are an assignee. By the event of your death, the proceeds of your insurance goes through to paying your debt first, and their interest or claim is limited only to the amount of you owe to them.
The beneficiaries, on the other hand, are limited to whatever portions allocated to them by you or by law. It is possible that one person can actually be the sole recipient of the death benefit.
7. Business partners
When you are running a business with someone else, you can both agree to take out an insurance for each with you as a beneficiary to his policy and vice-versa.
The intent behind this strategy is to protect the interest of the partner. In the event either of you dies, the one who’s left behind can buy the interest of the company of the deceased from the heirs or descendants. In this way, either you or your partner will not be forced to work with the deceased’s family in continuing the operation of the business.
People who are not related to the person insured by blood, business or financial interest may become beneficiaries.
For example, FWD insurance says that you can include your close friends. And this Rappler article also claimed that there were instances where same-sex partners may qualify.
To be honest, I know that non-family or non-business-related people like close friends, boyfriend or girlfriend aren’t approved to become beneficiaries. And that seems to be the same policy for most insurers.
So the FWD and Rappler info seem to be special cases. Thus, it is advised to speak with a financial advisor and find out if their affiliated company have a different rule on this matter.
What our laws say
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.