Buying a life insurance?
Naming a beneficiary is one of the major decisions when purchasing a policy. After all, the goal of insuring one’s life is to leave behind a sum of money that the beneficiary can receive when the insured passes on.
So who can be named a beneficiary? Is it possible for beneficiaries to be disqualified? What are some of the general rules when picking a life insurance beneficiary?
This article is a general guide that will try to answer these questions and more.
Table of Contents
What is a life insurance beneficiary?
In buying a coverage, the life insurance company (called insurer) agrees to insure a person’s life (called insured) for a determined amount of money in exchange for payment of premiums.
Upon the death of the insured, the insurer gives the money to a beneficiary.
The beneficiary can be a person or an organization, and they have to be named in the policy to receive its benefits.
Who can be a beneficiary?
Anyone and any organization can be named a beneficiary. There are of course exceptions specified by the laws in the Philippines, which is discussed in the next section.
A person whose life is insured is free to choose the beneficiary to whom the benefits of the life insurance will be paid. According to Section 11 of Republic Act No. 10607, otherwise known as the Amended Insurance Code, “The insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy.”
The Insurance Commission of the Philippines also stated:
“… an individual who has secured a life insurance policy on his or her own life may designate any person as beneficiary provided that such designation does not fall under the enumerations provided in Article 739 of the Civil Code, without prejudice to the application of Section 12 of the Amended Insurance Code.”
Insurance Commission of the Philippines, Insured’s Right to Designate Beneficiary
A related question in this topic is: must beneficiaries have insurable interest?
The Commission stated that, unlike insuring a property, it is enough that “the person securing the life insurance policy has an insurable interest in the life being insured.” This is in accordance to Section 10 of RA No. 10607:
“SEC. 10. Every person has an insurable interest in the life and health:
“(a) Of himself, of his spouse and of his children;
Republic Act No. 10607
Insurers are going to consider any beneficiary on a case-to-case basis. They may require proofs and documents about the relationship of the insured and beneficiaries, as well as the risks in a life insurance contract with respect to the said relationship.
We can also quote a courting ruling that said, “… it is obvious that the only persons entitled to claim the insurance proceeds are either the insured, if still alive; or the beneficiary, if the insured is already deceased, upon the maturation of the policy. The exception to this rule is a situation where the insurance contract was intended to benefit third persons who are not parties to the same in the form of favorable stipulations or indemnity. In such a case, third parties may directly sue and claim from the insurer.”
Who cannot be a beneficiary?
So who cannot become a beneficiary?
While it is true that the person securing their life is free to select beneficiaries, rules exist that do not allow a number of people from receiving proceeds of life insurance plan.
For instance, a beneficiary who is intentionally responsible for or involved in the death of the insured so that they can obtain the benefits of the policy. As mentioned previously, Section 12 of RA 10607 is written as follows:
“SECTION 12. 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. In such a case, the share forfeited shall pass on to the other beneficiaries, unless otherwise disqualified…”
Republic Act No. 10607
People who are not allowed to receive donations according to Article 739 of the Civil Code of the Philippines are also barred from getting insurance benefit.
This is based on Article 2012 of the Civil Code of the Philippines, “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.”
So who are those that cannot receive donations? The law provides,
Article 739. The following donations shall be void;
(1) Those made between persons who were guilty of adultery or concubinage at the time of the donation;
(2) Those made between persons found guilty of the same criminal offence, in consideration thereof;
(3) Those made to a public officer or his wife, descendants and ascendants, by reason of his office.
Civil Code of the Philippines
Are multiple beneficiaries allowed?
A policy can have more than one beneficiary. In the case of multiple beneficiaries, how a life insurance benefit is paid out is required to be clearly stated in the policy, and it is a decision made by the policy-owner.
When there are two or more beneficiaries, each can receive equal share of the death benefit. However, the policy can also spell out how much each will receive upon the insured’s unforeseen death. This is often expressed as a portion of the entire payout.
For example, it can be explicitly stated in the policy that half of the benefit may be paid to one beneficiary and whatever is left could be equally divided among other beneficiaries.
Bear in mind this is only one example. The payout can be divided however way the policy-owner wants. It just needs to be clearly set into the policy. If there is no such instruction, then the proceed may be divided equally among the beneficiaries and/or according the guidelines of the contract and insurer.
Primary beneficiary and secondary beneficiary
Another option to consider is in naming primary beneficiary and secondary beneficiary.
A primary beneficiary has the first claim in the proceeds, making them first in line when it comes to receiving the death benefit.
A secondary beneficiary, also called contingent beneficiary, can claim the proceed of a life insurance plan only in the event that the primary beneficiary is no longer around before the payout was issued.
A situation where this could be the case is when the primary beneficiary passed away before or at the same time as the insured.
An example is when parents select their spouse as primary beneficiary and their children as secondary beneficiary. Should the spouse meet an untimely death prior to or at the same as the insured, the children stand to inherit the benefit.
Will beneficiaries pay taxes?
It boils down to whether the beneficiary is irrevocable or revocable. Section 85e of the National Internal Revenue Code of 1997 states that,
“Proceeds of Life Insurance. – To the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable.”
National Internal Revenue Code of 1997
Irrevocable beneficiary and revocable beneficiary
No estate tax is charged when the death benefit is paid to an irrevocable beneficiary.
At first glance, this seems to be a good choice as one can rest easy knowing that the proceed is given whole and without any taxes. However, one also gives up the right to make changes to the policy, such as changing, adding, or removing beneficiary, without the consent of an irrevocable beneficiary.
On the other hand, estate taxes are due when the death benefit is issued to a revocable beneficiary.
One other thing is that a beneficiary is considered irrevocable when no changes to beneficiary were made during the lifetime of the insured. This provision is written in Section 11 of the Amended Insurance Code, thus,
“Section 11. The insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy. Notwithstanding the foregoing, in the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable.”
Republic Act No. 10607
Additionally, “proceeds of life insurance under a group insurance taken by employer are not subject to estate tax.”
Common examples of life insurance beneficiaries
Generally, these helpful guides can help you pick beneficiaries especially those:
- who rely upon your income
- who will suffer financially with your untimely passing
- who will be looking after your end-of-life care and funerary arrangement
- who you want to be financially taken care of when you’re gone
- who you do not want to be burdened with estate tax
- who you want to leave behind a legacy
It is worth mentioning that sometimes, life insurance can offer benefits while the insured is still alive.
For instance, plans that come with insurance riders can provide pay-outs. An example is a plan bought together with a hospitalization rider. When the insured is admitted in a hospital, the benefit that comes with a hospitalization rider may be claimed.
Another example is when a whole life insurance plan, such as a VUL plan, is surrendered. The policy-owner can obtain the cash value of the plan (in the case of VUL) minus all charges and fees when the plan is closed before maturity.
Moreover whole life insurance usually has a maturity when the insured reaches at a certain age, most often 100 years old. At which point, the benefit is issued.
What follows are common life insurance beneficiaries.
1. Spouse, partners, and children
People could prefer to pick their legal spouse they’re married with, individuals they intend to marry, same-sex partners, and children as beneficiaries (including illegitimate children).
These beneficiaries may depend on the income of the insured such as paying the rent, mortgage, education, food, and bills. So when the insured passes away, they may face hardship, debts, or bankruptcy. Having them as beneficiaries will cushion the financial impact of loss of income.
2. Parents, siblings, and relatives
Parents, siblings, and relatives can also be chosen as beneficiaries. This can be suitable particularly if the insured is the breadwinner, and these beneficiaries are dependent on their income.
Aside from immediate family (spouses and children), they may often be the people who will be responsible of the costs end-of-life care, funeral, and burial of the insured.
3. Lender
The benefit of a life insurance may also be given to lenders. It is arranged through mortgage redemption insurance (MRI) in the case of a mortgage or collateral security. Lenders are not beneficiaries in technical terms, but the death benefit is assigned to them. Their claim is limited to the amount owed.
4. Other beneficiaries
Other beneficiaries can also include trusted friends, business partners, or charity.
Can beneficiaries be changed?
Revocable beneficiaries can be changed. On the other hand, consent from irrevocable beneficiaries is required for any change on beneficiaries.
When to update beneficiary?
When is it timely to update beneficiaries of a life insurance?
Well, it depends. Updating the beneficiary cannot be done without the consent of irrevocable beneficiary.
If consent is granted or the policy has no irrevocable beneficiary, it is best practice to update the beneficiary whenever life-changing events occur.
For instance, parents can update their insurance plan after the birth of a child who is chosen to be a beneficiary. A person who is about to be or already married may want to designate the fiance/fiancee or spouse as a beneficiary.
What happens if there are no beneficiaries?
There are a few cases where a life insurance plan does not have any beneficiary. This could be a result of a number of things, like when beneficiaries have passed away or disqualified to receive the death benefit.
So what’s going to happen?
According to Section 12 of the Amended Insurance Code, “In the absence of other beneficiaries, the proceeds shall be paid in accordance with the policy contract. If the policy contract is silent, the proceeds shall be paid to the estate of the insured.”