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Have you purchased a life insurance already? If you have, do you still remember why you bought one (or even two)? Was it because your brother or sister was an insurance planner that you were compelled to buy one as a sign of “support”? Or perhaps you wanted a have a fancy funeral so that when your friends pay their last respect, they’d be very impress? Or was it because you wanted your children to take care of you and you promised to name them as beneficiaries in your multi-million policy?
There is no right or wrong answer. People buy life insurance because of different motivations; some humorous while others are serious. But below are some of the more compelling reasons why people insure themselves.
- Leave a legacy to a school, charity or church
Some people are just born benevolent. They are generous in their wealth. They give something back to the society and they want to continue supporting the cause even if they are gone. That is why some go out of the way to purchase a life insurance just to leave a legacy to their alma mater, their favorite charity or even the church they receive spiritual guidance.
Buy using the proceeds of the life insurance in supporting their advocacies; they are not depriving their beneficiaries (assuming he has some) of the inheritance that is due of them. Life insurance is one of the most efficient ways of donation.
2. Cash to help transfer your business to your family or partner.
When a business owner dies, his spouse, under the law has the right to replace her husband because the former’s assets, including company shares, are now transferred to her. There are times the spouse does not understand the business operation and this becomes detrimental to the whole organization. The other partners can always buy her out. But what if the deceadent's partner is the major shareholder and the other partners do not have enough cash to do so? Worst of all, they do not get along with their new partner.
Life insurance solves that problem. They can all enter into a buy-sell agreement with the proceeds of the insurance be used to buy out the spouse equivalent to the value of his husband’s share. That way, the remaining shareholders can continue running the company without any interference. Problem solved.
3. Cash to prevent family from selling properties
One of the more pressing matters after one dies is the settlement of estate taxes. The law grants the family six months to file the estate tax of the decease. That itself is not a problem but it becomes one when 1.) estate taxes run up to millions of pesos and 2.) the family does not have enough cash to pay the estate taxes.
It is not uncommon to find millionaires who are asset-rich but cash-poor. In situations like this, the tendency of the family is to sell some properties to raise enough liquidity to pay for the taxes and other immediate needs. Given the short period of time, some assets may have to be sold at a depressed price which is definitely disadvantageous for the family.
Life insurance solves that by providing cash immediately. The proceeds, assuming it is beyond the contestability period set by the insurance company, can be paid out within days after filing the claim.
4. Pay off debts
Although debts cannot be inherited, creditors can run after the assets of the deceadent to cover whatever debts they incurred while they were still alive. In these cases, the total estate the will be left for the family will be lower putting them at a disadvantage. By having a life insurance, the proceeds can be use to pay the creditors and the estate will be left untouched.
5. Take care of your love ones
Anybody who loves his family should insure himself. A life insurance serves as an income replacement in case the breadwinner dies prematurely. The family suffers a catastrophic economic loss: lifestyle will have to be downgraded and debts will be incurred.
If he’s insured, the death benefit can be invested by the family in a financial instrument that can provide them with regular income. Fixed income securities are good options. The family then may not need to downgrade their lifestyle. Better yet, they might even live a better life because of the instant millions they received!
How much should the coverage be? There is no definite answer. The process of going to the bottom line is better discussed in another article. But is should be enough to let the family enjoy the life they are living right now.
If you’re thinking of upgrading your coverage, do it now. Life insurance is the cornerstone of financial planning. One of my colleagues shared this to me when her husband passed away, “My cries would have been louder if my husband did not leave us with anything.” That is something worth thinking.
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