At the death of the insured person, a life policy pays a tax-free lump sum to the beneficiaries of the policy. The premiums, however, are paid with after-tax money, and so are not tax-deductible.
If you are in business, you can ensure that your company does not lose value at your death by entering into a ‘buy and sell’ agreement with senior staff, who would use policy proceeds to buy the business for value on your death. The money would go to your heirs.
Capital gains tax might be payable on the sale of the business, but the policy proceeds would be tax-free.
An endowment policy is an excellent instrument for forced saving. It can be used as security for debt and, although the premiums are paid after tax, the proceeds are tax-free.
As a business tool, this is a handy life raft, although its use is restricted to the business.
Protection from creditors
A policy upon your life is protected from the creditors of your estate, both during your lifetime and after your death, up to its full value, provided that the provisions of Section 63 of the Long-Term Insurance Act are complied with.
That is, the policy must be at least three years old; it must not have been taken out to cover debts or ceded for debt; and it must be payable to your spouse, child or parent.
In a family business, the benefits of such a policy are enhanced in that the policy can provide much-needed capital to buy a business from a parent, while at the same time providing liquidity for a surviving parent.
Another useful business tool is a retirement annuity policy, as it is protected against creditors. It cannot be used as security for debt, however, and must remain in force until you are at least 55.
A small lump sum is paid out and a portion thereof is tax-free.
The rest of the policy proceeds must be used to fund an annuity for you for the remainder of your life.
A retirement annuity policy is tax- deductible. It therefore has a double advantage: it is proof against creditors and may be used to save a bit of tax.
Because it pays out a small lump sum and the majority of the proceeds have to fund an annuity for income, it is not really suitable if the plan is to save for a lump-sum to buy a boat or a house at retirement, for example.
But it is useful for providing some income that is not susceptible to attachment by creditors.
Advocate Peter O’Halloran is a tax specialist.