Life insurance for cohabiting but unmarried couples can be confusing.
Ireland, being the country that it is, has many tax rules and laws that we primarily mightn’t like but secondly, are totally unaware of. I’ve been dealing with one such problem quite recently relating to how the revenue views the proceeds of a life insurance policy to a couple who are co-habiting but are unmarried.
In the census of 2015 we discovered there are over 140,000 co-habiting couples living in Ireland. Of those approx. 60% have children. The likelihood is that although these people are not married, they will have or will want to have financial protections in place such as life cover and mortgage protection, to ensure financial security for their family in the event of their untimely death. Makes absolute sense but the problem is, how will the revenue view such a pay-out if the worst does come to pass?
Most will believe they are leaving their partner and kids in a secure financial position but the reality can be very different. If you are in this situation you could be leaving your family with a significant inheritance tax bill without knowing it.
Allow me to explain. A co-habiting couple have a joint life insurance policy for €300k paid from one partner’s bank account. That partner dies so there is a €300k pay-out to the remaining partner as the remaining policy owner. As the couple were not married, the inheritance tax threshold is only €16,250 meaning the balance of €283,750 would be liable to tax at 33%. An unwelcome tax bill of €93,637 lands on the remaining partner’s doorstep, often with no means to pay it.
If the premiums were paid from a joint account they would still be liable for inheritance tax on half the proceeds of the life policy. Furthermore if the policy was set up on a single life basis and there is no will in place the proceeds would actually be paid to the next of kin and not to the remaining partner at all!
For married couples, however, any inheritance is deemed to be tax free so the issue only exist for cohabiting unmarried couple’s.
This unwanted tax bill is however entirely avoidable.
There is a method of setting up your life insurance in such a way that no tax liability is payable regardless of whether you are married or not. Each person simply takes out life insurance on the other i.e. on a “life of another” basis and pays the premium from their own bank account and income, the benefit would be paid out to the remaining partner of the policy without any inheritance tax owing saving most clients in this situation an absolute fortune.
If you are a co-habiting, unmarried couple it is really important to get in touch and have it reviewed as a simple change in the way your policy is set up could make all the difference to your partner and kids if the event you are trying to protect against actually does happen.
As always if you fall into this category please don’t just leave sleeping dogs lie, please get in touch and I’ll be happy to review your set up.
You’ll get me on firstname.lastname@example.org or give us a call on 01 531 0571.