Does a section 72 policy make sense?

Parents: mid 60s, reasonable health

Income: two good DB pensions, probably a net €7k a month income together. Spending less than income by €1k-€2k a month.

Assets: PPR (€500-€600k), cash deposits (€200k-€300k), no debts

As you can tell they are a bit coy about how much is in the bank but I know it's at least €200k. I'm an only child and sole beneficiary of the will, my lifetime CGT allowance completely intact. If their combined estate is €800k then there's a CAT liability on €465k, so at 33% that's €150k or so.

It makes sense I think for them to use some of their cash wealth to buy a section 72 policy to cover my likely CAT bill when the time comes. As I understand it they would pay a premium until both are deceased and the covered amount would accrue to me tax free.

In terms of downside potentially the Fair Deal and/or nursing care at home could eat into house and savings limiting my CAT exposure a lot. On the other hand in 15-20 years the house could be worth a lot more and as they age I would think their spending will only decline relative to two very good pensions. So my CAT exposure could get even higher.

I have no idea about such policies and where to take one out. Is there an age cut-off? Is there much by way of medical tests? Any insights appreciated - thank you!

Why would donors spend money to cover the future CAT bill of the recipient?

I don't get it.

Surely the bequest is enough generosity?

Maybe I don't understand these Section 72 policies?

If you stand to benefit, shouldn't you pay the premium?

NoRegretsCoyote said:

I have no idea about such policies and where to take one out. Is there an age cut-off?

Click to expand...

Policy needs to be effected before age 75 according to the above site.

Protocol said:

Why would donors spend money to cover the future CAT bill of the recipient?

Click to expand...

If you assume a break even in cash terms the money won't be taxed if it's paid in premiums before death but will be taxed if it forms part of the estate.

Protocol said:

If you stand to benefit, shouldn't you pay the premium?

Click to expand...

Revenue guidance says that the disponer has to pay it, not the beneficiary.

In your case, it's not necessary as you are not living in the house and you will not need the cash to pay the CAT.

So it would not be insurance - it would be an investment.

So they would be taking out insurance for €150k and probably index it as it's likely that they will leave far more than their current assets from the sound of things.

If they are both in their mid 60s and good health, it's very likely that one of them will live for another 30 years.

So it would all come down to the price.

In the other thread, it seemed to suggest that they would be better off giving you the premium each year and you invest it. Then you can hope for a long life for your parents.

Brendan

Brendan Burgess said:

In the other thread, it seemed to suggest that they would be better off giving you the premium each year and you invest it. Then you can hope for a long life for your parents.

Click to expand...

Thanks Brendan I had read that, and indeed a long and comfortable life is what I want.

Brendan Burgess said:

So it would not be insurance - it would be an investment.

Click to expand...

I guess I see it as a way of converting their wealth to a format that I would inherit tax free, so yes.

Protocol said:

Why would donors spend money to cover the future CAT bill of the recipient?

I don't get it.

Surely the bequest is enough generosity?

Maybe I don't understand these Section 72 policies?

If you stand to benefit, shouldn't you pay the premium?

Click to expand...

Another way of looking at it is Coyote is using some of his future inheritance to insure against the cost of his CAT bill.

At the end of the day, it comes down to cost. How much will it cost and how long will my parents have to live before the total premiums paid is greater than the amount paid out.

Running a quick quote for two 65 year olds, non smokers, cover of €150,000, not increasing is €4,660 a year. So one of them has to live to 97 for the cost of the policy to be more expensive than the benefit paid out.

Underwriting wise, there would be a medical required, possibly a report from their GP (this is usually required as at that age, there is a medical history).


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Steven Barrett said:

cover of €150,000, not increasing is €4,660 a year. So one of them has to live to 97 for the cost of the policy to be more expensive than the benefit paid out.

Click to expand...

€4,660 a year for 32 years at 0% return = €150k. But that assumes no return and that one euro today is the same value of one euro in 32 years.

If they invest €4,660 a year in an equity fund each year for 32 years and it returns 3%, they will have €252k.

If it returns 5%, they will have €368k

Even subject to CAT, this would be better than a Section 72 policy.

A Section 72 policy would be great if they both died early on in the policy's life.



Brendan

Brendan Burgess said:

What?

Are you equating euros in 32 years with euros today?

If they invest €4,660 a year in an equity fund each year for 32 years and it returns 3%, they will have €252k.

If it returns 5%, they will have €368k



Brendan

Click to expand...

If they died in 6 months, you could have €4,660 or even less if the market fell in that period. Under a life policy you would have €150,000.

That is the risk you take with life insurance. You do not know when it will pay out (it will in this case as it is a whole of life policy).

You can always work out the breakpoint on when an investment would generate a greater return than life cover. You also have to take taxes into account and any proceeds from an investment will be subject to CAT. The proceeds of a S72 policy aren't (unless the payout is higher than the CAT bill, in which case, the surplus is subject to CAT).


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Thanks @Brendan Burgess and @Steven Barrett I really appreciate your thoughts.

I guess there are a few concerns:

• The life policy would have an investment return that they are not getting at the moment on a lot of their wealth as it is parked in state savings and bank deposits. They are pretty risk averse and have never had wealth that isn't property or cash
• It would make more sense for them to convert their wealth into something that is not taxable for me than keeping it in a form that is taxable, even absent the investment return
• There isn't really an "insurance" angle here but it's really tax planning. I would be able to pay the CAT bill from the proceeds of the estate tomorrow or in 30 years, there is no reason for me to hold on to their PPR

I think the whole Section 72 thing is an awful way for wealthy people to avoid tax of course. But if it's there I think they should use it.

NoRegretsCoyote said:

Thanks @Brendan Burgess and @Steven Barrett I really appreciate your thoughts.

I guess there are a few concerns:

• The life policy would have an investment return that they are not getting at the moment on a lot of their wealth as it is parked in state savings and bank deposits. They are pretty risk averse and have never had wealth that isn't property or cash
• It would make more sense for them to convert their wealth into something that is not taxable for me than keeping it in a form that is taxable, even absent the investment return
• There isn't really an "insurance" angle here but it's really tax planning. I would be able to pay the CAT bill from the proceeds of the estate tomorrow or in 30 years, there is no reason for me to hold on to their PPR

I think the whole Section 72 thing is an awful way for wealthy people to avoid tax of course. But if it's there I think they should use it.

Click to expand...

Just to be clear on this, there is no investment element to the life policy. It is a whole of life plan but there is no fund or value to it at any time. There were those awful reviewable contracts in the past that did have a value but ended up being very expensive for policyholders.

Steven Barrett said:

Just to be clear on this, there is no investment element to the life policy.

Click to expand...

Thanks.

What I meant is that the expected value of the payout (assuming standard life expectancy) is higher than keeping it on deposit due to the fact that the life assurance provider invests the proceeds.

NoRegretsCoyote said:

Thanks.

What I meant is that the expected value of the payout (assuming standard life expectancy) is higher than keeping it on deposit due to the fact that the life assurance provider invests the proceeds.

Click to expand...

I thought you did

The recipient can pay the cost of the premiums by gifting each of his parents a sum less than 3000 per anum

Be aware that if they stop paying the annual premium, the accumulated value of the policy is lost. Although I think Irish Life simply deduct the premium from your fund, if you dont pay the premium.

I have an elderly parent with such a policy, but it does not matter to me or my sibling, as we are already sorted.

Steven Barrett said:

Another way of looking at it is Coyote is using some of his future inheritance to insure against the cost of his CAT bill.

At the end of the day, it comes down to cost. How much will it cost and how long will my parents have to live before the total premiums paid is greater than the amount paid out.

Running a quick quote for two 65 year olds, non smokers, cover of €150,000, not increasing is €4,660 a year. So one of them has to live to 97 for the cost of the policy to be more expensive than the benefit paid out.

Underwriting wise, there would be a medical required, possibly a report from their GP (this is usually required as at that age, there is a medical history).


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Click to expand...

This is a very good reason to take out a conversion option on an insurance policy when young.

My experience with a Sec 72 policy sold through a broker in a less than efficient manner, means I appear to have lost a considerable amount in needless premiums with Sec 72 whole life. Despite complaints directly to the insurance company I have got nowhere in correcting the issue and have met a wall.

I am now looking at cancelling this policy with a very substantial loss. The insurance company based in Europe would be a company i suggest anyone who deals with it needs to exercise very considerable caution.