Insurance can pay inheritance tax bills…at a price
I notice that you get a lot of questions about inheritance. I know this can be a very complicated area, but I remember hearing about an insurance policy that you can get and you won’t have to pay inheritance tax. Is this true and does it still exist? How it works? Would that make sense for someone like me who doesn’t have a lot of savings? My house will be the main thing I will leave to my two children. It is currently worth around €700,000.
– Mrs G.JE-mail
You remember well. And it still exists. These are called Section 72 policies, but their use is another matter.
As you can imagine, since they cover a tax bill, these contracts are highly regulated and are only useful for people with very large assets or whose beneficiaries could not afford to pay. settle an inheritance tax bill without, for example, selling the family home left to them.
So how do they work?
Essentially, a Section 72 policy is designed to meet part or all of an expected estate tax bill. However, while inheritance tax bills are paid by the beneficiaries under Irish law, a Section 72 policy is taken out by the person currently holding them.
Yes, the people paying the bill will not get any benefit from the policy they are paying the premiums for. This is, as Nick McGowan of Lion.ie Life Insurance puts it, a case where you are paying the insurance to hand over a house on which you have already spent 35 years paying off a mortgage.
As I said above, this only makes sense to a limited group of people. If the estate is particularly large, the payment of the premiums reduces the amount of assets exposed to inheritance tax on your death and therefore the amount to be covered.
Many families wouldn’t have those cash savings lying around – especially with a mortgage and young children.
Separately, for those whose beneficiaries are cash-poor, it allows parents, or whoever, to ensure that a valuable family asset – like the family home – is passed on to the family without having to be sold. to pay the tax bill.
If you consider a property worth €500,000 – and there’s plenty of that in Dublin at least – that parents want to bequeath to their only child, it will be well over the current €335,000 tax-free limit. on a parent’s inheritance. to a child.
Even if there were no other inherited property, the child would face a bill of €54,450 of the €165,000 by which the value of the property exceeds its tax exemption threshold. Many families wouldn’t have those cash savings lying around — especially with a mortgage and young children. The only way to pay the bill would be to sell the house. This is what the section 72 policy avoids.
The bottom line is that although the policy is underwritten by the deceased person, it does not form part of their estate as long as it is assigned to an inheritance tax bill. Instead, it is paid to the executor or personal representative handling the deceased person’s affairs.
How much does it cost?
Well, it’s expensive, there’s no getting around it. There are two reasons for this. First, Section 72s are guaranteed whole life insurance policies: they continue until you die, regardless of your age, and they are not subject to the kind of never-ending upward revision in premiums that makes most regular whole life policies impossible. expensive as you get older. The flip side is that you pay more for coverage upfront than you would under policies where premiums can be revised.
Second, for couples, they most often pay on a second life basis. When a person dies, their spouse can inherit everything from them without inheritance tax problems. The tax question only arises when the second person dies and his estate is passed on to other family members or friends.
We’re more used to policies, such as mortgage protection, that are paid out on a couple’s first death.
These factors aside, there are also the usual issues that impact life insurance policy premiums – your age, your lifestyle (do you drink or smoke), your health at when you take out the policy and, of course, the amount of cover you are looking for.
I asked Royal London to give me some examples so that readers can get an idea of the costs involved. The key is to assess the amount to be covered – and remember that it is not the value of the inheritance that you need to cover, but the amount of inheritance tax that should be paid on it. The policy will pay a fixed amount, although some providers allow you to adjust this over the term of the policy.
If it is too low, there will still be inheritance tax to pay. If it is too high – perhaps because you are selling some assets by then – the excess will be treated as an estate asset and subject to inheritance tax itself.
Naturally, if there are cash savings in the estate – or easily liquidated assets – you may not need to foot the whole bill. Likewise, if the beneficiaries have their own cash.
In this case, we worked on the basis of a potential tax bill of €500,000, so it is clearly a large estate with €1.5 million in assets beyond the tax exemption threshold. In all cases, these quotes are for second-to-die policies.
For a couple aged 64 and 60, who are both relatively healthy with no illnesses or conditions, Royal London says they can expect to pay around £907.35 a month. This assumes they are non-smokers and their alcohol consumption is within normal guidelines, with no history of alcohol abuse.
Age, lifestyle, or illness can significantly increase these numbers. For example, a couple aged 72 and 70, in which the elderly person smokes around 20 cigarettes a day and has been in remission from testicular cancer for five years, would expect to pay around €1,855.67 per month, according to Royal London.
The big issue is affordability. If you stop paying premiums, coverage dies and you’re back to square one
The couple would need to have an otherwise clean health check from their GP, including confirmation that there has been no recurrence of the cancer and that the second person covered has no lifestyle or increased medical risks.
If the smoker was the youngest of that same couple – the 70-year-old woman – and she had been in remission from breast cancer for three years, they could expect to pay around €2,070.58 a month – plus additional €200 each month – with other circumstances the same as above.
Is it worth it?
Well, if you are the healthy and clean couple of 64 and 60+, your premiums are €10,888.20 per year. That’s a lot of money, but you should have been paying premiums for almost 46 years before the insurance company won the case.
The big issue is affordability. If you stop paying the premiums, the coverage dies and you’re back to square one. This is important given the amount of premiums and the fact that older people tend to have significantly reduced incomes.
And remember, even after the first person dies, the surviving member of the couple must continue to pay those premiums or the whole arrangement falls through. Can they afford it?
Of course, the children – and it will most likely be for the couple’s children that they would consider such an expense – will benefit, and they can use the small gift allowance to help defray the cost of premiums if they can afford it. But it’s still a big ask.
If that’s something you want to consider – and that’s highly unlikely in a field like yours – there are, as I understand it, only three insurance companies in Ireland handling these policies . They are: Royal London, Zurich and Irish Life.
The other limiting factor is age. You must be at least 18 to take out a policy but, more relevant to most of us, you must do so before you turn 75.
With two children, they are entitled to inherit €670,000 between them. . . only €30,000 less than the value of your home. From now on, they would face a bill of €5,000 each, which shouldn’t necessitate such a policy.
Please send questions to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email [email protected]. This column is a reading service and is not intended to replace professional advice. No personal correspondence will be exchanged