Tax Efficient Life Cover: AKA Pension Term Assurance
Pension term assurance is a form of life cover that comes with one huge benefit — you enjoy tax relief at the marginal rate on your premiums.
This makes it up to 40% cheaper than regular life insurance. But there are certain conditions before you can access tax-efficient life cover.
You must belong to one of these categories to avail of pension term assurance:
1) Self employed
2) A PAYE worker in non-pensionable employment (for example, part of a firm with no occupational pension scheme)
3) Company director or an employer
4) Member of a group occupational pension scheme and your employer has set up a group AVC scheme.
Pension term assurance covers a period of time until you retire. If you die before a specified age in the policy (let’s say 65) then your loved ones will receive a lump sum to prevent them suffering financial hardship.
After you retire, you can convert it into a new life cover policy — without providing medical evidence. But it will only last until you turn 75 (you cannot obtain cover past this age).
There are clear tax advantages to buying pension term assurance compared to life insurance. For example, let’s say Patrick is a non-smoker age 35 who insures his life for €250,000, should he die before age 68.
His premium costs €22 per month with traditional life insurance. But with pension term assurance, his premium is subject to €8.80 tax relief (assuming he pays tax at 40%) reducing the premium to just €13.20 per month.
If you are a company director, you can obtain Executive Pension Term Assurance — this allows full corporation tax relief on the premiums.
The maximum level of life cover allowed in order to be eligible for tax relief is four times your Net Relevant Earnings (annual earnings less allowable expenses). There is no BIK (Benefit In Kind) payable for the director or employer.
Claiming tax relief on pension term assurance is a simple process — your policy documents will include a certificate to send to Revenue.
If you switch from self-employment to become a PAYE worker in an occupational pension scheme, you can usually exercise a conversion option so your cover continues but you lose the tax relief.
The tax treatment of payouts is identical for pension term assurance and normal term life insurance — your spouse will pay no tax on the lump sum settlement.