Do Unmarried Couples Pay Tax on Life Insurance?

Skip to my other article if you’re getting a mortgage together and you’re not married : Inheritance Tax on Mortgage Protection for Unmarried Couples

Three cheers if you’re “living in sin”

You didn’t bow to the pressure of paying north of twenty grand so your friends get drunk, your best mate gets to tell some dodgy stories and you get….well you get the bill.

Like I did.

Smart move by the way.

Never tell Hannah I said this.

But did you know that a wedding can actually save you money in the long run especially if you’re buying a house together?

What if you’re not buying a house, what if you’re buying life insurance to take care of your partner should the worst happen? Let’s take a look at two scenarios, one for a married couple and one for an unmarried couple:

Married couples life insurance

Ann and Barry have a life insurance policy of €400,000.

Ann pays the life insurance premiums.

They’re married and have two children.

Ann dies.

Barry, as the spouse,  receives the €400,000 payout tax-free.

• He uses this to pay for childcare so he can continue working.
• He pays for their children’s third level education.
• He takes the kids on a dream holiday every year.

Simple things that he and Ann had hoped for.

But what if Ann and Barry were single…like Jack and Jill.

Unmarried couples life insurance

Jack and Jill have a life insurance policy of €400,000.

Jack pays the premiums.

They are not married and have two children.

Jack dies.

Jill does not receive €400,000 tax-free.

You see, in the eyes of Revenue, Jack and Jill are “strangers” under tax law so the most Jill can inherit tax-free is €16,250 (tax free threshold)

The balance of €383,750 will be hit with inheritance tax of 33%.

That’s a tax bill for Jill of €126,638 ? (how much is a wedding again?)

Instead of €400,000, Jack and the kids receive €273,362, still a nice sum of money but a lot less than he had expected when he and Jill took out the policy.

What if both Jack and Jill had jointly paid the premiums?

If Revenue can clearly see that premiums were paid from a joint bank account then the inheritance tax bill will be halved down to €63,319. Not as bad but you could do better..

What’s the best way to take out life insurance for an unmarried couple?

If you’re neither married nor in a civil partnership, you can avoid paying inheritance tax on your partner’s life insurance.

How?

Pay each others premiums.

This can be done quite simply by taking out two “life of another” policies.

1. Jack gets insurance for €400k and Jill pays the premiums from her own bank account
2. Jill gets insurance for €400k and Jack pays the premiums from his bank account.

If you do this, the surviving partner receives any pay out tax free as the beneficial owner of the policy.

Here’s come the legalese…

Seek professional legal and tax advice as the information given is a guideline only and does not take into account your personal circumstances

Are two single life of another policies more expensive than one joint policy?

Yes, you’ll pay more for two single life policies but you’ll avoid a 33% Capital Acquisitions Tax.

Here’s an example:

Quote Type: Dual Life Insurance
First Person: Non-Smoker, born on 17/12/1977
Second Person: Non-Smoker, born on 07/05/1975
Cover Amount for First Person: €400,000
Cover Amount for Second Person: €400,000
Paying monthly, over 20 years.
Total Premium : €73

Splitting this into two life of another policies:

Quote Type: Single Life Insurance
First Person: Non-Smoker, born on 17/12/1977
Cover Amount: €400,000 paying monthly, over 20 years.
Premium : €36

Quote Type: Single Life Insurance
First Person: Non-Smoker, born on 07/05/1975
Cover Amount: €400,000 paying monthly, over 20 years.
Premium : €42

Total : €78

In this one the couple would pay €4 per month more but could save €126,638 – probably worth it you think?

What happens if you marry (eventually)

Goin’ to the chapel and we’re gonna get married
Goin’ to the chapel and we’re gonna get married
Gee, I really love you
And we’re gonna get married
Goin’ to the chapel of love

If you get married in a chapel, a registry office or on top of Everest, you can keep the two single life policies or switch to a dual/joint life policy if it’s better value.

Usually, it makes more sense to keep the two single life policies as by the time you get married (especially if you’re waiting for himself to pop the question), you might be very very old.

Just sayin’.

Life Insurance for Newlyweds

Over to you…

Are you and your partner considering life insurance?

Or did you take out a joint policy when you hadn’t the foggiest about these tax implications?

If you’d like me to make a recommendation on the types of cover you should consider based on where you are in life, please complete this questionnaire and I’ll be right back.

Nick McGowan
lion.ie | making life insurance easier