Mortgage, Business, Income Protection and more…
Protection
Life cover is one of the most important forms of insurance in Ireland. It is a practical way to help ensure that you, your partner, or your family cope with the financial burdens caused by the death of a loved one. Life cover pays out a tax-free lump sum “on death” during the term of the policy. This money can be used by your loved ones to help settle outstanding debts or loans, pay off a mortgage, pay bills, whatever it takes to make them financially secure. The objective of life cover is to sustain the standard of living of the household after the loss of a loved one & their income.
What determines the cost?
The cost of life cover will depend on a number of different factors, these include:
The amount of protection you need
Your age group
The period of cover – the longer the term of the plan, the higher the cost
Whether you smoke – smokers pay a higher rate for cover
Your current state of health
Whether you want to add options to the plan, i.e. indexation or a conversion (allowing you to extend the term of a policy)
Mortgage Protection
Congratulations, you have found your dream home and secured a mortgage. However, the funds won’t be released until you have a Mortgage Protection Policy in place! It is a requirement that you have a mortgage protection policy that will be assigned to the lending institution in order to drawdown your mortgage. The purpose of your mortgage protection policy is to pay off your mortgage should you die. You are not compelled to take out a policy with the mortgage lender, let us shop around to get you the best value in the market.
Business Protection
A business insures its building, its machinery and stock. But often management and key personnel are the most important and valuable assets!
How would your business survive if:
- One of your key employees or shareholders became seriously ill or died suddenly?
- Your business partner died?
- What would happen to their share of the business?
- How would you feel about a shareholder’s family joining your business?
- If you died, what would happen to your share of the business?
- Are your spouse or children in a position to take your place in the business?
- How will your family survive financially?
These questions should be a cause for concern for every business. You need to talk to about Business Protection.
Arranging adequate business protection insurance is the only way to ensure that the necessary funds will be available, in a cost-efficient manner to ensure the continuity and the survival of the business.
Areas of Business Protection that we at Murray & Spelman Financial Services Ltd will advise your business includes:
Co-Director Insurance
The directors of a company are often the major shareholders, who make all the key decisions. A successful business depends on the close cooperation and experience of the directors. The death of one of the directors can have a serious impact on both the surviving directors and the deceased’s successor(s). The remaining directors may be faced with a new shareholder and director who has little business expertise or a person they would rather not work alongside. Disagreements may arise if the deceased’s successor(s) has different plans for the future of the business. Ideally, the remaining shareholders/directors or the company would buy back the deceased’s shares but may not have sufficient funds available to do this. The deceased’s successor(s), on the other hand, may not wish to become involved in the business and might find it difficult to sell their shareholding. They might indeed welcome a cash sum at this difficult time.
Co-Director Insurance gives the directors of a company the peace of mind that there will be funds available to them, to buy back his/her shareholding from his/her successor(s) should one of them die, thereby maintaining their control of the company.
Partnership Insurance
A Partnership arises when two or more sole traders come together and share the profits or losses of that Partnership. The death of one of the partners can have serious financial consequences for those left behind in that business. Partnership Insurance will protect the financial security of the partnership by making sure that funds are available to compensate the deceased partner’s estate for his/her share of the Partnership.
Keyperson Insurance
When running a business, it is vital to consider and plan for events that could adversely affect its success. In particular, it is important to consider the implications to a business of the sudden death or serious illness of an essential employee – a key person in the business. Having Keyperson Insurance in place will minimise the financial impact of losing key employees. The employer pays the premiums and in the event of death of the insured, a cash sum is provided which will help to maintain the business and protect its future security
The death or diagnosis of a serious illness of a keyperson could put a business in a financially unstable condition in a number of ways:
- An interruption of business activity and a consequent reduction in profits.
- Bank loans on which the keyperson gave a personal guarantee may be called in.
- The keyperson may be due repayment of any loans made by him/her to the company.
- Banks and/or suppliers may reduce or withdraw credit facilities over worries about the future profitability of the business.
- The loss of the individual’s expertise and business contacts.
- The need to commit resources to find a suitable replacement. This may be a prolonged process if the individual had unique experience and expertise.
Group Risk and Pension Scheme Benefits
Offering your employees Death in Service, Income protection and Pensions benefits will help retain staff and enhance employee satisfaction.
One of the main challenges for businesses is to attract and retain good staff. Having a comprehensive employee benefit package, such as pension, death-in-service, and income protection benefits, can really put you ahead of the competition.
Proposition
At Murray & Spelman Financial Services we have the track record and experience to ensure the management of the Pension Scheme runs smoothly for your Business, the Management team and Employees.
We will arrange an initial comprehensive presentation followed by periodic presentations to scheme members to explain how their pension plan works, their investment options and the other employee benefits provided by your Business.
The key elements in the delivery of this service are proposed as follows:
Employee / Member engagement
We will design an engagement plan which will include the following advisory services:
- Employee Benefit Package – we will actively promote the Pension Scheme and associated benefits to all members of staff through group presentations, video calls and one to one meetings. We will help members to engage and understand their retirement planning process to enable them to better prepare for their retirement.
- Pension Funding Review– we can analyse members pension position, by looking at member target pension, contribution level and pension investment performance.
- Financial Wellbeing / Personal Financial Reviews – when requested by the members, we will advise on their day to day personal financial arrangements to ensure their goals will be achieved. This includes, pensions benefits accrued from previous employment, Life & Serious Illness cover, Mortgages and Savings/Investments.
- Joining the Pension Scheme – when new members are joining the pension scheme we will engage with and advise the member as to how the scheme works and the benefits.
- AVC Investment– we will advise and encourage Additional Voluntary Contributions (AVC’s), in addition to member pension scheme contributions. Illustrations on how AVC payments can enhance member retirement benefits will be explained.
- Leaving Service Options– when leaving service, we will advise on member leaving service options.
- Retirement Advice – when members have reached their retirement age, we will engage with them on the retirement options available to them, maximising their Tax-Free Lump Sum, advantages/disadvantages of Annuities v’s Retirement Funds. The purpose here is to cut through the jargon, to empower the member to choose the best option for them based on their circumstances.
- Risk Benefits – these benefits are generally undervalued and misunderstood by employees until they are needed (family benefits on death and disability).
It is important that we assist employee understanding of the pre and post retirement planning issues with pensions. It will contribute to the feeling of financial wellbeing.
New or Existing Schemes
Issues to consider when setting up or accessing existing schemes
- Vesting Rights
- Employment Categories
- Risk Benefits
- Trusteeship
- Pension Pricing
- Bundled 0r Unbundled
- Provider Assessment
- Emerging Legislative Obligations – IORP II, (Auto Enrolment)
Group Risk
Employers can provide Group Risk Benefits to their employees under three heading:
- Group Life Insurance (Death-in-Service) ensures that an employee’s family or dependents will be financially provided for in the event of the employee’s death. Payment to the employee’s dependents can be made via Lump Sum, Spouse’s Pension or Children’s Pension.
- Group Income Protection, (Permanent Health Insurance – PHI) protects your employees from loss of income due to long-term illness or injury. Income Protection is designed to provide an income for employees if they are unable to work for a prolonged period of time due to illness or injury. Payment begins once a predetermined period called the “deferred period” has passed since the onset of the condition leading to the claim.
- Group Serious Illness Cover pays a lump sum to employees if they are diagnosed with one of a number of specified serious illnesses. A serious illness payment will be made only once. It provides a lump sum (and, sometimes, a dependent’s pension benefit) on the death of a member of a scheme.
Why would an employer set up Group Cover for their employees?
- As an employer you can write off the full cost of providing the benefits against corporation tax.
- Recruitment and Retention of employees
- It is an attractive benefit to offer current and future employees.
- The underwriting requirements for group life assurance are much less stringent than for individual life assurance cover.
- Some employees who may not qualify for individual cover, may qualify group cover
- As cover is organised on a group basis, costs are significantly lower than equivalent individual life assurance cover.
- Administration much more straightforward than purchasing equivalent life assurance cover policies for each individual employee.
- Employer contributions to a pension are treated as a business expense and are not subject to Employer PRSI
- Employer contributions do not count towards the individual’s Revenue limits
Auto-Enrolment
The Irish Government is planning to launch an auto-enrolment pension scheme from 2022. Automatic enrolment in Ireland is being mooted as a measure that, if introduced, could bridge the pension gap.
The State pension retirement age has been in the news a lot lately. Will the qualifying age be extended upwards or be reduced back down?
Pension Time Bomb
You may have heard the above term in the news. What does it mean and why should it concern you? It’s all down to Irelands demographics! For every, one person who retired in 2019 there were five workers – by 2050, for every one person retired there will be only two workers!
If introduced, automatic enrolment would oblige employers to introduce a workplace pension scheme and automatically enrol their employees into the scheme. Employers would then be obliged to contribute a percentage of an employee’s salary to help fund their retirement.
The Government is also supporting this idea to bridge the pension gap. This gap exists and will certainly continue to grow because the State pension will not be sustainable in the future due to increasing life expectancy and an ageing population.
Specified Serious Illness Cover Explained
A serious illness can have a dramatic impact on a person’s life. It can prevent a person from working and in some cases take a long time to recover. Specified Serious Illness cover helps provide financial support to those who are diagnosed with a “serious illness”. The three most frequent claims Specified serious illness are Cancer, Heart attack and Stroke.
How does it work?
With Specified Serious Illness cover a lump sum is paid out if an individual is diagnosed with one of the specified illnesses covered in their plan. The illness must be diagnosed during the term of the policy & meet the providers definition of the illness. The lump sum payment will assist in the financial implications of becoming ill, for medical treatments, necessary home alterations, helping to pay bills or loans such as a mortgage.
How much will it cost?
The cost of a Specified Serious Illness cover policy will depend on a number of different factors, these include:
- The amount of protection you need
- Your age
- The period of cover – the longer the term of the plan, the higher the cost
- Whether you smoke – smokers pay a higher rate for cover
- Your current state of health
Income Protection Explained
Income Protection is designed to provide payment of a regular income to you, should you be unable to work for a period of time due to an accident or illness. This can help safeguard your lifestyle and can help you get back on your feet. This will help you keep on top of those important bills such as mortgage repayments, car loans, rent and more.
How does it work?
Income protection can cover up to 75% of your earnings, less any State Illness Benefit, and gives you a replacement income until you are medically able to return to work or you reach a chosen retirement age, whichever comes first. It is different to health insurance – it’s insurance for daily living. When illness or injury leaves you unable to work, income protection gives you financial security.
How much will it cost?
The cost of an Income Protection cover policy will depend on a number of different factors, these include:
- The amount of income you wish to protect
- The chosen waiting period also referred to as deferred period normally 13 or 26 weeks
- Whether you smoke – smokers pay a higher rate for cover
- Your age & the nature of your occupation
- Your current state of health
- When you want the plan to finish – any age between 55 and 70 years can be chosen
Inheritance Tax Planning (Section 72)
Ask yourself this question, if you and your spouse were to die tomorrow and everything you own (including your home) was passed to your children, would they be faced with an inheritance tax liability and be forced to sell assets to pay Revenue?
There is a solution. By taking out a Section 72 Inheritance Tax policy, you are making provision for the tax bill that may arise when your children inherit your estate. A Section 72 policy is a Life Insurance policy set up by parents under trust for their children. The proceeds of the policy are exempt from Inheritance Tax because they are used to pay Inheritance Tax. The effect is that you have made provision for some or all of the tax liability.
The Capital Acquisition Tax rate is currently 33%.
The annual Gift exemption is currently €3,000 per person p.a. to each beneficiary.
- Your age
Any values transferred above the thresholds below will incur a tax of 33%.
Tax exempt thresholds for beneficiaries
Group A:
- Each child is currently entitled to receive up to a maximum of €335,000 in respect of gifts or inheritances from their parents without incurring a tax liability.
Group B:
- Where the beneficiary is a lineal ancestor, descendant, brother, sister, or child of brother or sister of the disponer, they may receive up to a current maximum of €32,500 without incurring a tax liability.
Group C:
• In all other cases (including common law spouses/co-habitants) the tax free threshold is currently €16,250.
Planning for Gift Tax (Section 73)
Relief is given in Section 73 of Capital Acquisitions Tax (CAT) Consolidation Act 2003 to allow people to plan for the payment of gift tax (Section 73) in a tax efficient way. If a life assurance savings plan is put in place to provide for the ‘relevant’ tax, Revenue will not charge Capital Acquisitions Tax on the plan proceeds if the money is actually used to pay gift tax.
What is the benefit of taking out a Section 73 savings plan?
The benefit of using a ‘qualifying’ life assurance savings plan to fund for the payment of gift tax is that, as long as certain conditions are met, the proceeds of the plan when used to pay your beneficiaries gift tax bill, will not increase the gift tax liability.
Revenue restrictions and requirements.
Certain Revenue conditions must be met for the savings policy to qualify for relief under Section 73 Capital Acquisitions Tax Consolidation Act 2003.
- The policy must be expressly set up under Section 73 of Capital Acquisition Tax Consolidation Act 2003 for the purpose of paying gift tax
- Premiums must be paid continually for at least 8 years (premiums can be paid monthly, quarterly, half yearly or yearly).
- The policy must be in the name of one person (only a married couple or civil partners can have the policy in joint names).
- The policy owner(s) must pay the premiums.
- The maximum difference between the highest and lowest annual premium over the period is not more than 100%.
- If premiums are not paid for 1 year, no further premium may be added.
- If premiums stop for 1 year before the end of 8 continuous years, the relief can’t be applied.
- The proceeds must be used to pay gift tax due on a gift made within 1 year of the proceeds being paid.
- The policy owner has 1 year from the date they withdraw the money from the policy to pay the gift tax due. After this date the relief will not apply.
Once all Revenue requirements are met, it means that if the money withdrawn from the policy is used to pay your beneficiary’s Gift Tax liability, it will not increase the overall gift tax liability.
We advise that you seek professional tax and legal advice as the information given is a guideline only and does not take into account your personal circumstances.
Protection Cover for Cohabiting Couples
Most people are aware that all benefits passing between married couples are exempt from Inheritance and Gift Tax. Previously, this relief only applied to “legal spouses”. As a result of the changes in Finance (No 3) Act 2011 this ‘spouse’ exemption was extended to registered civil partners. All other cohabiting couples are still treated as strangers for Inheritance and Gift Tax purposes. The “stranger threshold” (Threshold-Group C) for Inheritance Tax is currently €16,250. Inheritances in excess of €16,250 are subject to tax at 33%.
Summary
- When putting in place “mortgage protection” type cover, arranging the cover on a joint life first death basis may give rise to a potential tax liability.
- When putting in place additional “family protection” type cover arranging the 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.
Case Study
John and Mary buy a house in joint names. They contribute equally to the deposit, mortgage repayments and joint mortgage protection policy.
John dies in the first year of the mortgage (House valued at €500,000).
Mary inherits 50% of property (assuming held as joint tenants).
The mortgage is cleared by the Mortgage Protection Policy.
Threshold for Mary is €16,250 with tax at 33% on €233,750 = €77,137.
Life of another cover can help John and Mary make provision for this unwelcome tax liability.