Life insurance provides protection against economic loss by enabling the policy owner to share the loss with others exposed to similar risk. It is a financial tool designed to protect individuals against financial hardship in the event of a loss occurs.
According to the Insurance Code or IC, life insurance is insurance on human lives… or connected therewith. (Section 181, Insurance Code). The insurance benefit may be made payable upon the death of the person, or on his surviving a specified period… (Section 182)
It encompasses every contract or undertaking for the payment of annuities, including contracts for lump sums under a retirement program managed or acting as trustee by a life insurance company.
A life insurance policy can be made payable upon the death of the person, or on their surviving a specified period, or otherwise contingent on the continuance or cessation of life.
Contracts or pledges for endowments or annuities are also considered life insurance contracts.
For regulatory purposes, even a contract of suretyship can be deemed an insurance contract if made by a surety doing insurance business. (RA 10607)
Nature of Life Insurance Contracts
Generally, life insurance is a valued policy, not a contract of indemnity, meaning the payout is the fixed sum in the policy. An exception is when the insured’s interest has exact pecuniary measurement, like a creditor insuring a debtor.
Insurable Interest: A Requirement in Getting a Life Insurance
Insurable interest is required in life insurance. Insurable interest is a situation where a substantial economic loss will occur against the owner if the insured dies. This loss may happen due to an unforeseen event that may cause harm. (Section 3, Insurance Code)
Rationale: (1) Insurable interest ensures that the insured has a genuine interest in preserving the subject matter. (2) This is also to prevent wagering contracts that are against State policy. Wagering contracts are speculative agreements that are akin to gambling. Without a genuine insurable interest, people may abuse insurance and turn it into gambling or wagering. (Accidental Death Benefit Clause: Provides additional benefits if death results from accidental means3) The presence of insurable interest reduces the temptation for the insured to intentionally cause a loss, as they would also suffer a pecuniary loss. Without the requirement of insurable interest, anyone can insure their enemy, kill them, and get the proceeds.
Insurable interest also exists for any person on whom one depends wholly or in part for education or support, or in whom one has a pecuniary interest.
Furthermore, there is insurable interest in the life of any person under a legal obligation for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance.
Finally, an insurable interest exists in the life of any person upon whose life any estate or interest vested in the insured depends. For these latter categories (dependence, pecuniary interest, legal obligation, or dependence of an estate), the basis of insurable interest is pecuniary interest, not necessarily blood relationship.
A creditor has an insurable interest in the life of their debtor, but not the other way around.
Who can be insured by life insurance?
Every person has an insurable interest in their own life and health. This extends to the life and health of their spouse and children.
Basically, anyone in the Philippines can be insured except a public enemy. (Section 7, IC) Who are public enemies? In the case of Filipinas Compañia de Seguros vs. Christern Co. Inc., the Supreme Court ruled that “All individuals who compose the belligerent powers during a state of war… are public enemies.” Belligerent means hostile. The citizens or aliens serving the hostile country during war is a public enemy. This is consistent with the law of nations where all trading, all acts that increase income, transmit money, and insurance on the lives of aliens in service of the enemy are prohibited. The purpose of war is to cripple the resources of the enemy. It will be absurd if your enemy destroyed your property, or was killed, and will then be enriched because of the money of your countrymen pooled from insurance.
Who are qualified and disqualified from being beneficiaries?
A life insurance policy typically designates a beneficiary who will receive the insurance proceeds upon the insured’s death.
Generally, when one insures their own life, they can designate any person as the beneficiary, whether or not that beneficiary has an insurable interest in the life of the insured.
However, there are exceptions, such as those disqualified to receive donations under Article 739 of the Civil Code.
If someone takes out an insurance policy on the life of another person, the beneficiary must have an insurable interest in that life; otherwise, it can be considered a wagering contract.
The insured generally has the right to change the beneficiary they designated in the policy unless they have expressly waived this right (by designating them as irrevocable).
If the insured does not change the beneficiary during their lifetime, the designation is deemed irrevocable.
Policy Clauses
- Incontestability Clause: After a life insurance policy has been in force for two years from issue or reinstatement, the insurer cannot contest the policy or deny a claim due to fraudulent concealment or misrepresentation by the insured. The insurer has two years while the insured is alive to contest the policy.
- Accidental Death Benefit Clause: Provides additional benefits if death results from accidental means.
Suicide: The insurer is liable for suicide only if committed after the policy has been in force for two years from issue or last reinstatement, unless the policy has a shorter period. Suicide due to insanity is always compensable. (Section 183 of the Insurance Code)
Policy Lapse and Prevention: Policies have a grace period for premium payments. To prevent lapse, options include automatic policy loans from the cash surrender value, application of dividends, and reinstatement within three years of default, subject to proving insurability and paying overdue premiums. The insurer can deny reinstatement if not satisfied with insurability.
Types of Life Insurance
- Whole Life: Permanent protection with various premium payment options.
- Term: Coverage for a specified period, payout only if death occurs within the term.
- Endowment: Pays proceeds to the insured if they survive to a certain date or to the beneficiary if death occurs earlier.
- Industrial Life: Premiums paid monthly or more often, with a limited face amount. It has a four-week grace period for premium payments (or one month/30 days if premiums are monthly).
- Variable Life/Variable Unit-Linked (VUL): Another type of life insurance.
Taxation on Life Insurance
Life insurance proceeds paid to heirs or beneficiaries upon the death of the insured are generally excluded from gross income for income tax purposes. (Section 32 of the Tax Code, NIRC)
However, interest earned if the proceeds are held by the insurer is taxable43 . Proceeds may be taxable if used to secure a money obligation or if there’s a transfer for valuable consideration44 . Premiums paid by a taxpayer on a policy where they are a direct or indirect beneficiary are generally not deductible45 . However, employer-borne premiums for group life insurance are usually not considered a taxable fringe benefit.
Transfer of Policy
A life insurance policy can be transferred by transfer, will, or succession to anyone, regardless of insurable interest, and the transferee can recover what the insured could have. Notice to the insurer is generally not required unless expressly stated.
Interpretation of Policy
Insurance policies are construed liberally in favor of the insured and strictly against the insurer. This, however, only applies if there is ambiguity. The rationale for this is that insurance contracts are contracts of adhesion.
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