Section 72 Life Insurance: The Ultimate Guide to Tax-Efficient Wealth Transfer in Ireland

How Section 72 Life Insurance Policies Work for Inheritance Tax Planning

When you pass away, your beneficiaries may face a significant inheritance tax bill, currently at 33% on amounts above the tax-free threshold.

A Section 72 policy provides a tax-free lump sum specifically designed to cover this liability.

We’ve covered the ins and outs to creating a will in this blog. 

Example Scenario:

Sarah plans to leave her children an estate worth €1.5 million.

The current tax-free threshold for each child is €400,000.

Without Section 72:

• Taxable amount: €1,100,000
• Tax due at 33%: €363,000
• Net inheritance: €1,137,000

With Section 72:

• Policy pays out €363,000 tax-free
• Children receive full €1.5 million estate
• Policy proceeds cover the tax liability

Here is an interesting article on Section 72 Life Insurance. 

Benefits of Section 72 Life Insurance in Ireland

1. Tax-Efficient Wealth Transfer

• Policy proceeds are specifically exempt from inheritance tax
• Can be used to cover multiple beneficiaries’ tax liabilities
• Helps preserve family wealth intact

2. Estate Planning Flexibility

• Can be structured to match expected inheritance tax liability
• Allows for regular premium payments instead of lump sum provision
• Can be adjusted as estate value changes

3. Cost-Effective Solution

• Premiums often lower than the eventual tax liability
• Can be more affordable than alternative wealth transfer strategies
• Provides certainty around inheritance tax funding

Key Considerations When Setting Up a Section 72 Policy

 1. Policy Requirements

To qualify for Section 72 relief, policies must meet specific criteria:

• Must be a whole-of-life policy
• Premiums must be paid at least annually
• Policy must be specifically approved by Revenue
• Cannot be surrendered or altered significantly

 2. Premium Planning

Consider:

• Age when starting the policy (younger is typically better)
• Health status (medical underwriting required)
• Expected estate value and growth
• Regular premium affordability

3. Trust Structures

Most Section 72 policies should be written in trust to:

• Ensure proceeds are immediately available
• Avoid probate delays
• Maintain tax-efficient status
• Direct benefits to intended beneficiaries

Comparing Section 72 with Other Wealth Transfer Strategies

 1. Lifetime Gifts

Pros:

• Immediate transfer of wealth
• Can utilize annual small gift exemption

Cons:

• May trigger immediate tax liability
• Lose control of assets
• Limited tax-free thresholds

 2. Life Insurance

Pros:

• More flexible terms
• Often lower premiums

Cons:

• Proceeds may be subject to inheritance tax
• May not align with tax liability timing

Common Mistakes to Avoid

1. **Insufficient Coverage**

• Regularly review policy coverage against estate value
• Consider future estate growth
• Account for all potential beneficiaries

2. **Premium Payment Gaps**

• Missing payments can invalidate Section 72 status
• Ensure sustainable premium level
• Consider premium funding strategy

3. **Poor Trust Planning**

• Failing to write policy in trust
• Incorrect beneficiary designation
• Inadequate trust documentation

Steps to Implement a Section 72 Strategy

1. **Assessment Phase**

• Calculate potential inheritance tax liability
• Evaluate current estate planning
• Determine coverage needs

2. **Policy Selection**

• Compare provider options
• Review premium structures
• Check Revenue approval status

3. **Implementation**

• Set up appropriate trust structure
• Arrange premium payments
• Document policy details

4. **Regular Review**

• Monitor estate value changes
• Review premium adequacy
• Update beneficiary needs

Conclusion

Section 72 life insurance represents a valuable tool for Irish professionals planning their estate.

When properly structured, it provides a tax-efficient solution to inheritance tax challenges, helping ensure your wealth transfers smoothly to the next generation.

However, successful implementation requires careful planning and ongoing management.

Consider consulting with qualified financial and legal advisors like us ensure your Section 72 policy aligns with your overall estate planning strategy.

Get in touch with us today.

*Note: Tax rates and thresholds mentioned are current as of 2024. As tax legislation can change, always verify current rates and requirements with Revenue or a tax professional.*