Sunday, October 30, 2016

When and Why Do You Need Life Insurance?

Whether you find it uncomfortable talking about it or not, death is inevitable for all of us. We will all die someday. The question is, what would happen to your loved ones if you suddenly pass away?

do you know how your assets will be divided after you die?
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Yes, conversations about death and finances can be depressing and are even considered taboo by many. However, when should families talk about it? When the head of the family is already dead and everyone’s stoked to fight tooth and nail for his/her inheritance? "Fights over land, for instance, can be avoided if there’s already a plan to divide it between the children BEFORE the parents die," pointed out Registered Financial Planner Aya Laraya during the most recent Sun Life #Money4LifeChallenge talk for bloggers.

He said people who sign up for life insurance policies usually have these end goals in mind: to take care of the family, to provide cash, to replace income, or to continue a child’s education. However, one thing is missing in the list – inheritance tax.

unfreeze assets by paying estate taxes 
Did you know that even if you have a last will and testament, none of your assets can be transferred to your family until the inheritance tax is settled? The good news is that an irrevocable life insurance is not covered by estate tax so your beneficiaries can redeem the insured amount and use it to pay for the necessary taxes (instead of finger-pointing who should shoulder the amount).

So, what are taxable assets? These include cash, houses, land, investment portfolio (stocks, mutual funds, etc.), vehicles, jewelry, art/paintings, and livestock. How much inheritance tax is imposed? That’s 20% after basic deductions (funeral expenses, previously taxed properties, family home, and medical expenses).

death and taxes
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“We work so hard for our assets but don’t take care of the paperwork!” emphasized Aya who shared some of Filipinos' bad money habits. Aside from avoiding any talk about death or dying, some people jump over rules (e.g. bypassing certain processes to save money or giving bribes to government officials to draw questionable paperwork) while some would withdraw money from an already dead person’s ATM account. Eventually, these actions will get you into trouble and more expenses.

Aya’s advice to parents:
• Get a life insurance policy and let your beneficiary know about it. Otherwise, what’s the point of a life insurance?
• If you already have an existing and fully paid life insurance policy, do not assume everything is okay. Check if it is still valid. Some companies get absorbed or bought out by another company. If that’s the case, have your certificate modified ASAP.
• Remember, whatever kind of life insurance you’ll get, you should have one. Talk about it with your family.
• Make sure to write a proper will. It can override the law if done properly (e.g. in case you'd want to disinherit your son and you choose to give the inheritance to your grandchildren instead).
• The law presumes that all heirs should get an equal part of the inheritance unless otherwise stated in the will. So hire a lawyer to do the paperwork because you can, for example, give a property exclusively to one person (like your son/daughter but not to his/her spouse).

don't decide on getting a life insurance when it's already too late
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“If you don’t talk about inheritance with your family, the law will take care of it for you after your death and you may not like what would happen,” warned Aya. “Do it while you still have the mental competence and establish early on what you want done.”

Here are Aya’s tips to choosing the best life insurance plan:
List down what coverage you’ll need 
Shop around and know how much policies are worth
Budget for it
Read the fine print of everything you sign 
Always monitor because over time, conditions, laws, and your needs may change
Consider riding on a group insurance if your company has one because it is way cheaper than paying for it on your own

before signing, always make sure you read the fine print
Again, unless you’re comfortable with the default that the government gets to decide who gets what, keep in mind why families need to go out of their comfort zones, now! Start talking about death and how life insurance can help minimize problems when the family’s breadwinner passes away. 

“Plans should evolve alongside your life,” reminded Aya. “However, you should buy life insurance for the estate tax and not for capital gains. Otherwise, that would be like buying a jeepney and expecting it to run like a sports car." 

By the way, I advocate for financial literacy for fellow Filipinos and dream to see all of us living better lives. If you are interested to talk to a competent and reliable financial advisor, let me know so I could refer you to ours. She handles my and my husband's Sun Life policies and is very accommodating in answering any questions we have. FYI, she will not pressure you to buy anything. Just let her explain to you your life insurance policy options and then you can decide whether you'd also like to build a trustworthy relationship with her or not :)

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