Life of another cover

In last weeks blog, I suggested cohabiting couples take out life of another cover to protect themselves financially if their partner dies. People have been asking me what life of another cover is and how does it differ from normal life cover.

Life of Another Cover

Usually, people take out life cover on their own life. If they die prematurely, the proceeds of the policy is paid to their estate. In the majority of cases, the proceeds of an estate are paid to the surviving spouse which passes to them tax free.

For a cohabiting couple though, they are entitled to just €15,075 tax-free and the remainder of the estate left to them is taxed at 33% (It must be specified in a will or they get nothing). To get around this, the couple can take a policy out on each others lives. The best way of explaining this is by example.

Brian and Aoife have been living together for 5 years now and have 2 kids. Brian works and they decided that Aoife will raise the kids. Under life of another cover, Brian takes out a life cover plan on Aoife’s life and Aoife takes one out on Brian’s life.

Two things have to be satisfied for life of another cover:

1. Insurable interest. Does Brian suffer a financial loss by the death of Aoife and vice versa? They live together and have kids together. If Brian died, there would be no income for Aoife and the children. If Aoife died, Brian may have to take some time off work, reduce his future working hours and pay for someone to look after the children and the house. It is pretty easy to show that there is a financial loss by the death of either party.
2. Who pays the premiums? If you take out a policy on someone else’s life, you have to pay for it. If there is a situation where one party does not have their own bank account, the premiums can come from a joint account.

As Brian is the owner of the policy on Aoife’s life, if she died, the proceeds of the policy do not form part of her estate. It is paid directly to Brian tax-free. In fact, because it doesn’t go through probate, the proceeds can be paid much quicker as the insurer does not have to wait for confirmation on where the proceeds are to be paid to.

If you have any questions, please contact me directly at steven@bluewaterfp.ie