Key Post Is a Section 72 policy good value?

Brendan Burgess

Brendan Burgess

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This was raised in another thread . I have never seen an example of how it works in practice.

Let's say I am 65 and am worth €1m which I want to leave to one daughter.

I am in good health.

I take out insurance for the CAT bill.

The CAT bill if I were to die today would be about €220k (€1m -€335k) @33%

So I take out insurance for €220k.

1) How much would that cost me?
2) It's a whole of life policy as I understand it. The premium is fixed and I pay it every year I live.
3) If I die early , it's great value. If I live to 100 it's probably bad value.
4) I presume that the premium is fixed at the outset?
5) Is the premium for a Section 72 policy the same as the premium for an ordinary life insurance policy?


Let's say I die at 75, my daughter gets a pay out of €220k tax-free.

But what if my assets have reduced and the CAT liability is only €100k?

Or let's say when I die my asset are worth €2m. She will have a CAT bill of €550k. She gets €220k tax-free and pays the €330k.
 
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How common are these policies?

What age do people take them out?
On the one hand, it would seem pointless for a healthy 45 year old to take one out.
But presumably it would be more expensive for an unhealthy 65 year old to take one out.

Are there circumstances where it makes sense? For example

  • A family home worth well in excess of €335k but no other assets
  • A beneficiary who does not have the money to pay the CAT liability
  • A particular age range
It might make more sense where the CAT bill would be large because the beneficiary was in Group C.

Likewise are there circumstances where it makes little sense
  • If the children are unlikely to receive in excess of €335k
  • If the donor is 75 or over (Is there an age limit?)
 
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I generally believe that lifetime planning is a more effective way of addressing estate planning. For example simply making use of the annual €3k small gift exemption to everyone you know can be extremely effective. But for those interested in the maths here is a worked example

Case study: Male aged 57 next birthday

A €1m sum assured policy has an annual premium of €22,500pa (subject to underwriting Feb 2022) so the payoff looks like this:

Picture1.jpg

For illustrative purposes.

Picture2.jpg


For illustrative purposes. Tax rates could change


Even after 30 years the effective gross of Irish Tax return is still coming in at around 3.8% per annum and because the proceeds are tax free if used to pay CAT, there is an additional uplift in value to the estate of 33%.

This gives a projected effective annual return of a little over 5.75% pa with virtually no investment risk at all over a 30-year period.

These can represent reasonable value compared to a very low risk option like cash if taken out when in good health and reasonably young age, but in reality most investors should be better off with an equity portfolio over these time frames
 
Marc said:
in reality most investors should be better off with an equity portfolio over these time frames
Click to expand...

@Marc

That is exactly the analysis I was looking for. As a pure investment, buying equities is probably better.

But if someone had a house and no other cash, then maybe it would be worth paying the insurance.

Brendan
 
Brendan Burgess said:
But if someone had a house and no other cash, then maybe it would be worth paying the insurance.
Click to expand...

If a significant proportion of your wealth is tied up in an asset such as your PPR, there is a massive risk in not being able to afford the premiums without an income source. As soon as the premium goes unpaid, all benefits would be lost. Not only would your beneficiary still have a CAT bill but you would have wasted thousands on the voided policy

The figures supplied by Marc do not stack up for me. How could an insurance policy still be "profitable" to the consumer well into their 90's and not breaking even until >100 years old?

Insurance policies are designed to make money for the insurance company, Marc's graph implies that it is a gaurenteed winner up to 100 years old.

Another point to consider, while there will be some widowed/separated/single individuals, it doesn't make sense for anyone with a spouse to use one of these policies as it will be a CAT free inheritance. You should at least be waiting until you are widowed

It would be much more interesting to see stats on the actual payouts for these types of policies and in particular, how many policies lapse due to non-payment of the premiums.
 
_OkGo_ said:
The figures supplied by Marc do not stack up for me. How could an insurance policy still be "profitable" to the consumer well into their 90's and not breaking even until >100 years old?
Click to expand...

Doesn't the chart state the opposite? Only if the customer lives to >100 do the cumulative premiums exceed the payout.

_OkGo_ said:
It would be much more interesting to see stats on the actual payouts for these types of policies and in particular, how many policies lapse due to non-payment of the premiums.
Click to expand...

This is an important point indeed. You would need a highly reliable income source if you take out one of these policies.
 
NoRegretsCoyote said:
Doesn't the chart state the opposite? Only if the customer lives to >100 do the cumulative premiums exceed the payout.
Click to expand...
I think we are saying the same thing but I have phrased it poorly using break-even as it normally imples things get better beyond the breakeven point.

What I meant was the point at which cumulative premiums match the payout are somewhere around 102. So it still beneficial to the consumer even if they survive to their late 90's. It would be the insurance companies break-even point when the consumer hits 102, hardly a viable business model.
 
_OkGo_ said:
Another point to consider, while there will be some widowed/separated/single individuals, it doesn't make sense for anyone with a spouse to use one of these policies as it will be a CAT free inheritance. You should at least be waiting until you are widowed
Click to expand...

It's possible to arrange such policies on a "joint-life, second death" basis, i.e. only pays out when both spouses have died.
 
_OkGo_ said:
It would be the insurance companies break-even point when the consumer hits 102, hardly a viable business model.
Click to expand...
But a lot of the value of the expected payout comes from the investment returns on the premiums, no?

I'm not an actuary but for life insurance pricing is mainly a function of life expectancy of the customer times expected investment returns before death.
 
The more I think about it, the less attractive they are.

If someone only has a house and no other assets, then they probably couldn't afford to pay the premium.

If they can afford to pay the premium, the probably don't need the insurance.

Brendan
 
Regarding the sums here, probably of benefit to all if the @Duke of Marmalade has some time on his hands and feels inclined to educate us. On the reverse surface of my envelope, I can't see, based on the premiums shown, how this is a good bet for the insurer.
 
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The insurers have an army of actuaries working for them, so I wouldn't worry too much about the profitability of Section 72 policies

Basically, it's about peace of mind for the policy holders which comes at a cost
 
What happens if an elderly parent who has been paying the premium for many years, then gets dementia or something else, and they cant manage to pay the premiums anymore.

Also, the policy refers to settling the CAT liability of the estate. Do the individual beneficiaries still have to pay the tax?
 
The policy wll lapse - not a very good idea at all

No, the proceeds of the policy pay the tax on their behalf
 
These aren’t for widows and orphans. They’re for people for whom the €335,000 threshold isn’t enough. A relative of mine took at one recently enough and I believe it was around €15,000 a year for €1m of cover. So the equivalent of €1.5m in cash when the tax benefit is taken into account.

I believe in simplifying things. €1m of cover is the same as €1.5m in cash because of the tax benefit. Plus, it’s insurance, and like most people I pay a few thousand a year for health, motor, and home insurance, and thankfully I’ve never had any material claims. When I pop my clogs, I’ll have paid a six figure sum over my lifetime.

Section 72 seems to be better in that it’s just life cover.
 
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I have copied or moved posts from other threads to this thread to keep them in one Key Thread on the issue - Brendan.

Sorry but in my book it would be absolute madness to pay so much to mitigate a liability that may never even arise, unless you have a specific and compelling reason to do so on foot of impeccable professional advice.

Who knows if inheritance tax will remain at current levels or even exist in 30-40 years time?
 
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I'm with Tommy on this. OP and wife are very likely not using up annual small gift exemption ( 2 donors x 3 kids is €18k per annum before adding another 6k for each kids partner and more again for grandkids).

Pay the €515/month into an investment that belongs to the kids. You can stop, start, increase or decrease. If you stop, the investment is not lost. There will be no CAT on the investment or on its growth- which is a big factor over the sort of time frame likely to be involved.
 
Even without the inherent tax break, I think I’d prefer to invest the €515 per month and give them the resulting value rather than take out an expensive insurance policy that I’m lumbered with forever.
 
Section 72 policies are popular in the UK as over there, gift tax does not exist but a gift turns into a taxable inheritance if the donor dies within 7 years of the date of the gift.

In that context, they make eminent sense for such a finite period but I doubt they were ever designed to operate for periods of up to half a lifetime.
 
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