Life insurance
Life insurance can be used to ensure that there are no or fewer financial problems after death. However, it is important to properly determine who exactly is the beneficiary of the insurance policy. It is also important to check who entered into the insurance agreement.
Who is the policyholder?
This is important because, if the person whose life is insured is also the one who entered into the insurance agreement, the payment from the insurance is subject to inheritance tax. This is also the case if the person who entered into the insurance and the person whose life was insured were married in community of property.
Who is the beneficiary?
As mentioned, it is important to see who exactly is the beneficiary. This is because a policy of life insurance does not automatically follow the will or the fact that someone is cohabiting or married again. As a result, it is important to keep a close eye on who is designated as the beneficiary in the policy.
Pledge / power of attorney
In many cases, a bank wants life insurance linked to a financing. The policy is then pledged to the bank and often the bank becomes the first beneficiary. In situations that then involve a property owned by two people who are both debtors, a cross policy is often used. In such a cross policy, the other person's life is mutually insured. The policy then becomes payable only on the death of the first.
In such a situation, the bank is usually fine with the longest living person remaining the first beneficiary, provided they give a power of attorney to the bank to use the payout for loan repayment. If repayment is made on the basis of that power of attorney, the surviving spouse repays a debt half of which belongs to the assets of the first dying person.
This repayment has the effect of giving the surviving spouse a claim against the estate of the first deceased. This can be annoying if each of the partners has children from a previous relationship.
Example
Suppose A and B live together and have a house worth €200,000, a debt of €180,000 and a cross policy paying out €180,000. They each have a child from a previous relationship. There is no will.
On A's death, the policy formally comes into payment to B, who uses the payment to pay off the joint debt. B thus gets a claim on A's heir. A's estate then amounts to: half house €100,000 -/- debt to B of €90,000 = €10,000. B then takes over the house, cancelling the €90,000 claim and pays €10,000 for it. When B dies a year later, his estate house amounts to €200,000, while the debt has been repaid.
This means that the policy they both paid for eventually ends up with the child of the person who happens to have lived the longest.
In a situation where the bank was beneficiary, there was a proper cohabitation agreement and a good will, A's child would have shared.
In many cases, more inheritance tax is due after the deaths of both partners if the partner is beneficiary than if the bank or estate is beneficiary. Depending on the situation, this need not even result in additional tax at the first death.
For more information on life insurance, beneficiary, pledge and power of attorney, please contact us. We will be happy to advise you.
