Nobody likes taking out Life Insurance but nobody every complains when a Life Insurance claim is paid out.
We need Life Insurance at various stages in our lives, not so much when we are young but as we get older we need Life Cover to get a mortgage and if we get married and have children we need even more Life Cover to protect our family’s income in the event of our death.
The Life Insurance market is very competitive and as a result prices have dropped in recent years. If you are self employed, or work for an employer who doesn’t provide an occupational pension scheme you may qualify to take out Life Insurance with Tax Relief and reduce your monthly outlay.
This type of Life Insurance is called Personal Pension Life Insurance or a Section 785 Policy after the provision in the Taxes Consolidation Act, 1997. It suffers from a branding issue and is often overlooked when someone is considering life cover. I think a lot of people don’t even look at it because of its association with Pensions. The fact is that it’s just standalone Life Cover, you don’t even have to be paying into a pension to take out.
Who can take out Personal Pension Life Insurance:
- Anyone who is a Self Employed Sole Trader
- If you are an Employee and not paying into an Occupational Pension Scheme
Are there any restrictions with Personal Pension Life Insurance:
- There can only be one person insured on the policy.
- The policy can’t be assigned to someone (for example to a bank as security for a mortgage)
- The term of the plan can only run to your retirement age or 75, whichever comes first.
- Tax relief is restricted to the age related limits for Personal Pension contributions. As long as you are not paying the maximum contribution into your Pension you should get the tax relief.
How does the Tax Relief work:
There are two ways of claiming Tax Relief on Personal Pension Life Insurance.
- You pay the full monthly premium by Direct Debit. As soon as the plan starts, notify you local Revenue Tax Office of the premium you are paying and they will adjust your tax credits. After that, your salary will increase to reflect the Income Tax relief (either 20% or 40% relief).
- Or, include the Total Premium for the year in your Personal Tax Return / Income Tax Return before the Pay and file deadline. It will be offset against your Tax liability for the year or if you have no further tax liability your will receive a refund.
John is aged 48 and works as a Dentist. He is Self Employed and a Sole Trader. He has an Income of €80,000 per annum and pays €18,000 into a Personal Pension Plan.
He takes out €250,000 Personal Pension Life Insurance at a cost of €58.03*.
Net Relevant Earnings: €80,000
Maximum Pension Tax Relief: 25% of €80,000 = €20,000
Personal Pension Contribution: €18,000 per annum
Personal Pension Life Insurance Premium: €696.36 per annum
As the total of John’s Pension Contribution and his Personal Pension Life Insurance Premium is less than €20,000, John will get 40% tax relief on the Life Cover Premium. The net monthly cost for €250,000 goes from €58.03 per month to €34.82 which is a saving of 40%.
*price at 03/11/17 – Male, Age 48, Non-Smoker, Cover to Age 68, Conversion Option & Premium Price Match