When putting in place “family protection” cover for your cohabiting clients there are two things to consider:
1. Who the sum assured is intended for, and
2. How will that sum assured be taxed.
Who receives the benefit
When structuring family protection for non married couples it is important to remember that cohabitants have no automatic rights to their deceased partner’s assets under the Succession Act. So if your cohabiting clients have no Will in place, the proceeds of a life assurance contract could end up in the hands of the deceased’s ‘next of kin’, their parents or brothers and sisters, if the arrangement is not structured correctly.
Lets take a couple:
David and Sarah are living together in a house they purchased jointly. They have mortgage protection cover for their loan and they feel their other life assurance protection needs are covered as they both have existing ‘own life’ life assurance policies.
On David’s death the mortgage protection policy pays off their loan. As joint owner, Sarah inherits their family home but as she owns an apartment with her sister she is not eligible for family home relief. She is not concerned however as she is going to use the proceeds of David’s old life assurance policy to pay her Inheritance Tax bill.
David did not leave a Will. As his cohabiting partner Sarah has no rights to any of David’s assets under the Succession Act so the death benefit from David’s life assurance policy is actually paid to his parents, as his next of kin.
Will the benefit be taxable
With the exception of the family home, the total value of all assets passing between two people who are not married or civil partners of each other are liable to Inheritance and Gift Tax, regardless of how long the couple are living together. This includes the value of any life assurance benefits. So, where a cohabiting partner inherits other property, including a death benefit under a life assurance policy, the €16,604 stranger threshold could easily be exceeded. This could have a significant impact on the sum assured received from a life assurance policy.
Whether or not Inheritance Tax will have to be paid will be decided by two things:
- Who will receive the policy proceeds on death (the beneficiary)?
- Who paid the premiums on the policy?
If the beneficiary did not pay the premiums, or if the beneficiary is not the legal spouse or registered civil partner of the person who paid the premiums, the policy proceeds will be liable to Inheritance Tax.
From a tax perspective ‘partners’ are treated as ‘strangers’ for Inheritance Tax purposes with a threshold of only €16,604 (currently) tax free.
Arranging life cover on a single life “life of another” basis will avoid any potential liability to inheritance tax but only where
the proposer actually pays the premium. It will also ensure the proceeds are paid immediately to the policy owner / proposer.