Section 72 Life Insurance Cover
A Section 72 policy is a Whole of Life insurance policy that is guaranteed to pay out a lump sum (Sum Assured) to the policyholder on their death (or on the death of the 2nd spouse if a Joint, Last Survivor policy) as long as premiums are paid for life.
The distinct advantage to this Section 72 policy is that the proceeds of the policy will ultimately be tax-free to the beneficiaries, as long as the proceeds are used to pay Inheritance Tax. With current CAT rates of 33%, this is a big future saving.
The biggest caveat here is that the policyholder(s) would have to complete a health questionnaire and pass a medical; the attractive premiums don’t apply if the Life Insurance company ‘loads’ the premium for health reasons.
Premiums are generally very good value and a lot better value than one may expect. The reasons for this are:
1) A high portion of policyholders let policies lapse (and by default make premiums cheaper for those who don’t).
2) There is no inflation protection in these prices i.e. Life Insurance companies have assumed rates of return etc. for future years with what they do with premia.
Section 73 Savings Policy
A monthly premium investment policy is set up with an Insurance company, specifically endorsed as Section 73.
A Section 73 policy is very similar to a s.72 policy in terms of the tax efficiency; the main difference being that a s.73 policy covers Gift Tax (33% Gift Tax on Lifetime gifts) as opposed to 33% Death Tax (a.k.a. Inheritance Tax)
This policy works as follows:
o A Savings / Investment policy is set-up with a Life Insurance company. It is specifically endorsed as Section 73 and an investment fund is chosen in which to invest the contributions. The choice of fund will depend on the level of risk and other investment objectives that Compass Private Wealth can advise on.
o A monthly, regular contribution is made into the Policy every month. The market value of the fund will obviously depend on performance and the amount of contributions, the same way any investment / savings policy would work.
o After 8 years of consistent monthly contributions, the policy then becomes tax efficient as such. At any time after 8 years, the proceeds of a Section 73 policy can be gifted to a third-party beneficiary and these proceeds are exempt from 33% Gift Tax as long as, in the same 12-month period, that same beneficiary had Gift Tax payable from a separate gift.
o One could look at a Section 73 policy as a standalone clever investment strategy; paying monthly contributions into an investment fund to benefit from Euro Cost averaging. The fact that there is s.73 attached is an added bonus; one doesn’t even need to use the s.73 kicker as such.
Ultimately, these policies represent a window of opportunity for families to minimise wealth erosion through taxation for future generations.
Who are these polices suitable for?
Policyholders would need to have liquid capital available to meet the cashflow requirements that the contributions will take up.
Age profile for Section 72 policies can be any age but is more suitable for those between 50 – 70. For Section 73 policies, any age is fine.
For families where there will be gift or inheritance taxes payable at some stage in the future i.e. if a future Estate will exceed the Capital Tax Thresholds (€420k for parent to child).
High Level Overview of the difference between both policies
While these 2 policies are similar in purpose (to reduce intergenerational wealth erosion through tax), there are some clear distinctions that ultimately make one policy more preferential to some people and the other policy more suitable to others.
The main difference is that one is an Insurance policy (s.72) while the other is a Savings Policy (s.73). Therefore, the benefits of the s.72 policy can’t be seen in the lifetime of the policyholders, whereas the s.73 policy gives the policyholders the option to have control over the gift and tax reduction process.
A Section 73 Savings Policy has the additional feature of growing an investment fund with the ability to simply stop contributions at any stage and cashing in the policy
One key misinterpretation with these policies as that they are solely for tax purposes; on the contrary, each policy on a standalone basis has merits:
o A Whole of Life Section 72 policy will pay out a lump sum on death regardless. The fact that the proceeds are tax-free when used to pay Inheritance Tax is secondary
o A Section 73 Savings Policy will build an Investment Fund by benefiting from Euro Cost Averaging. Secondary to that, you will have the option but not the compulsion to utilise the policy to reduce future gift tax.
Taxation of Policies
Because both policies are ‘wrapped’ by an insurance company, there is no ongoing, complex reporting to Revenue on fund addresses, distributions, withholding taxes being unclaimed etc. Furthermore, your need for ongoing third party financial or investment advice with these policies is minimal (this cost is generally not included in the Total Expense Ratio of ETFs etc.)
Both policies are insurance policies, and both will be subject to the 1% Life Insurance Levy that currently exists.
Any capital value increases in the Section 73 policy will be subject to a 38% gain (35% gain from 2027) on the value versus the base cost on sale or after 8 years, whichever is earlier. Until this event, the fund rolls up tax-free so there is no annual income tax to be accounted for.
Disclaimer: Compass Private Wealth does not provide tax advice. This is guidance only and please consult your own tax advisor. This document is not to be construed as formal advice. In order to receive formal advice, we would need to have a completed Factfind on file and you would have had to have received our Terms of Business document. The contents of this document are therefore for discussion purposes only.