Do you have Adequate cover?

More and more couples in Ireland are choosing to cohabit and have children now, rather than marry. If you are one of these couples, have you spoken about ‘life of another’ family protection or personal protection?

When it comes to protecting your family its important that you have the correct cover. Do cohabiting couples have adequate and appropriate protection in the event of death?

Why do you need ‘life of another’

From an inheritance tax perspective, Revenue treats cohabiting couples as strangers when one partner dies. This treatment may cause a significant portion of their jointly owned inherited property to be paid in tax.

‘Life of Another’ Cover explained

So let’s paint the picture. Ann and Barry are unmarried and jointly own a house together, valued at €300,000. They have 2 lovely children named Jack and Jill. They have the following protection in place:

• Joint mortgage protection policy that clears the mortgage in the event of either of their deaths
• Ann also has a term life cover policy for €200,000 to provide for the children in the event of her death, which is also paid for from the joint account.

5 years later Ann dies in a tragic accident. Barry already owns 50% of the house and inherits the other 50% from Ann, valued at €150,000. What happens from a tax perspective?

As Ann and Barry were not married, the threshold for property passing between them in the event of death is €15,075.
The balance of €134,925 is taxable at 33%, which results in a tax bill of €44,525 for Barry.

The good news is that you can still avoid this €44,525 tax bill using the Dwelling House Exemption Relief. If a house which has been someone’s main residence, they may be exempt from inheritance tax subject to certain conditions (that’s a story for another day).

Tax Implications

What are the tax implications for the €200,000 term life cover policy for the purpose of replacing Ann’s income though? This is liable for tax at 33% which amounts to a massive €61,038.

What’s the solution?

If Barry structured protection policy number 2 on a ‘life of another’ basis, he, Jack, and Jill would receive an extra €61,038 to help with their financial difficulties.

This structure means Barry owns the policy, makes the claim in the event of death, and since he has paid the premiums the proceeds go to him tax free.

Barry receives the proceeds directly, not Ann’s estate, which avoids any probate delay.  Another important point is that there can be no claim on the policy proceeds from any relatives of the deceased.

Hopefully, Jack and Jill will see their parents grow old together, but statistics from the CSO show that at least 1 kid in a junior infant’s class of 20 kids will have to deal with the death of a parent in the next 10 years.

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