Why is Single Pay VUL better than Cash Deposits for Estate Planning Purposes

If you have experienced receiving cash in the bank as an inheritance from your mom or dad, then you might have experienced how tedious and difficult the process was.

I used to work for a law office specializing in estate planning. We handle clients who are just planning for their estate and, also, heirs who are waiting to receive their inheritance. I can vividly remember a certain account where the heirs engaged us to help them receive their inheritance. The inheritance was only cash in banks. My initial thought was “pera lang sa bangko, madali lang ito”. But then when I started working on this client, it dawned on me that it was more complicated than real properties or even insurance. It was more tedious and it takes a lot of time before the heirs can get the money from the bank. Here’s why:

1. Cash in banks are part of the gross taxable estate. This means that the cash in bank will be frozen upon death of the estate owner until the estate tax has been paid. Under TRAIN law, the heirs can withdraw the cash provided that a 6% final withholding tax will be divided from the bank account. This makes it convenient but expensive. Let me give you a sample illustration:

• Juan died with P1Million cash in bank
  • Option 1: heirs chose to withdraw the fund subject to 6% final withholding tax.
    • P1 Million X 6%= 60,000.00
    • P1 Million less 60,000.00= P940,000.00 (net)
    • Here the heirs will receive a net cash amount of P940,000.00
  • Option 2: heirs chose to settle the estate first then get the cash in bank.
    • Taxable Estate less deductions= Net Taxable Estate
    • Int his case the Taxable Estate is P1M, however there is an allowed Standard Deduction of P5M making the Net Taxable Estate at zero.
    • Since Net Taxable Estate is zero, even if you multiply it with the Estate Tax Rate of 6%, you will not be paying any Estate Tax.
    • Here the heirs will receive a net cash amount of P 1Million since no amount has been paid as estate tax.

                          If you are the heirs of Juan, which option will you choose?

2. Banks have differing requirements when releasing the inheritance. If you have cash from different banks, then your heirs will have to deal with those banks differently. Each bank has their own requirement before your heirs can claim what is rightfully theirs which can complicate the process. Imagine having multiple banks, that would mean multiple different processes and requirements for withdrawals.
3. Getting the money from the bank requires more time and patience and additional cost. It took our client more than 1year to claim the money from the bank. This is because of the many requirements that bank is asking the heirs to submit. Some of these requirements include:
   1. Heir’s Bond (executed by all heirs)– which you should get from a nonlife insurance company. This will cost you around 1 to 3% depending on the amount of the cash in bank. This is a requirement whether you choose to settle the Estate Tax ahead or not.
   2. Claimant’s Declaration- unique for every bank
   3. Death Certificate of the Depositor
   4. Proofs of affinity/ affiliation of the claimant/ heir to the decedent (birth certificate)
   5. Identification documents (at least 2 acceptable IDs)
   6. Evidence of deposit (passbook)
   7. Deed of Indemnity (an agreement executed by 2 solvent persons which frees the bank for any claims or liabilities that the 3rd parties may bring against the Bank due to the release of account)
   8. Extra Judicial Settlement- without a will or Court Order- with will
   9. Surety Bond
   10. BIR Certification that the tax on decedent’s estate has been paid or the same is exempted from estate tax.

It was then that I realized that the main purpose of banks is to facilitate transactions for your immediate needs. It is not meant to safekeep a huge amount of money since it is difficult to transfer that money to the heirs and also it is subject to garnishment. That may be the reason why PDIC insures only P500,000.00 of our money in the bank.  Which makes me think, what is now a better alternative for banks? That’s when I learned about Single Pay VUL Plans.

A single pay VUL plan is a life insurance plan with investment that is paid only once. It provides growth opportunity for investors while giving a safety net of 125% of the initial investment in case of death of the owner. To illustrate:

Let’s say Juan invested P1 Million in a Single Pay VUL Plan last 2020. By year 2021, the fund grew to P1.1 Million. If Juan will die on 2021, the beneficiaries will either receive P1.1 Million (fund value) or P1.25 Million (insurance coverage) whichever is higher. In this case, the insurance coverage is higher so the heirs will receive P1.25M. 

This benefit will give the owner the peace of mind that whatever happens to the market his family will get at least 125% of what he initially invested.

Now, you might be asking why a Single Pay VUL plan will be better than banks during estate settlement. Single Pay VULs are like mutual funds, you pay once and there is no need to pay again. However you can top up which is optional. The difference being mutual funds are offered by mutual fund companies and Single Pay VULs are offered by Life Insurance Companies.

Here’s a comparative of the difference between Bank Deposit and Single Pay VUL.

Aside from the benefit of the Single Pay VUL to the heirs, it also provides higher investment return (that can range from 4 to 20%) for the owners as compared to a bank that has a very minimal (less than 2%) interest rate. This can be used and withdrawn by the owner even while they are still alive.

To end, it is important for the estate owner to properly plan so that inheritance will remain as a blessing and will not a curse. To get more information about Estate Settlement, Estate Planning and Single Pay VUL you can email us at customercare@aetosfph.com.