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Domestic partner and with a mortgage: careful when choosing life insurance

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De facto couples are increasingly common in Spain. The most normal thing is that they are equated to traditional marriages, although everything depends on the autonomous community. If you are a common-law couple and want to take out life insurance, you must make sure that your policy is a good fit for your situation. Otherwise, you could pay a lot more taxes if you have to collect the insurance.

More than one 15% of couples in Spain are already de facto couples, according to data from the National Institute of Statistics (INE). They are a type of family that has been increasing in recent years and that can generate doubts, since it is a figure that changes in each autonomous community.

Being a common-law partner or marriage can lead to differences in tax matters. Therefore, when signing any contract, the legal situation must be taken into account. If you are a common-law couple, share a mortgage and want life insurance, you must ensure that the policy fits well.

As a general rule, there is equality between spouse and common-law partner in tax matters. That is, it is considered that the common-law partner is like a spouse . However, everything depends on the legislation of each autonomous community .

Families with life insurance who also have a mortgage can choose two options. The first is that life insurance pays the mortgage to the bank in the event of death (these are the policies known as «mortgage life insurance»). The second is that the compensation money goes to a beneficiary (the other member of the couple, the children, the parents …). Depending on the type of policy, the tax payment will be different.

1. Mortgage life insurance

They are those that are contracted so that, in the event of disability or death, part or all of the debt is automatically paid. That is to say, the mortgaged ones do not get to collect the life insurance: the money is kept by the bank, which is the beneficiary.

If these policies pay the debt to the entity, it is understood that there is a capital gain of the mortgaged, according to Nuria Diez, a lawyer specializing in tax matters at Legálitas. When a debt (the mortgage) is eliminated, the equity increases, so the personal income tax (IRPF) would have to be paid for that money.

Thus, if one of these policies pays off the mortgage of a common-law couple after the death of one of its members, the person who survives will have to pay personal income tax . On the other hand, it is not computed as capital gain for the deceased.

How the personal income tax is calculated

Personal income tax is used to tax the income that a person receives: their salary, their investments … It is a progressive tax that is calculated based on some income brackets; a different percentage is applied to each section. This percentage is made up of a state data and a regional one, so is not the same in all regions.

Mortgage life insurance is computed within the general tax base. Except for some regional variations, these are the sections that would be applied:

  • From 0 to 12. 450 euros: 19 %
  • Of 12. 450, 01 euros to 20. 200 euros: 24 %
  • Of 20. 99, 01 euros to 35. 200 euros: 30 %
  • Of 34. 200, 01 euros to 60. 000 euros: 37 %
  • From 60. 000, 01 euros: 45%

2. If the compensation is received by another person

In case someone receives the money from life insurance, they will have to pay inheritance tax (IS). There are three variables that influence the calculation of this rate: the amount of money inherited , the degree of kinship with the deceased and the community autonomous where the deceased resided (not the beneficiary).

This is how the degrees of kinship are classified in Spain, according to the Law 29 / 1987, Inheritance and Gift Tax:

  • Group I: descendants and adoptees under 21 years.
  • Group II: descendants and adoptees older than 21 years, spouses (and domestic partners, depending on the community), ancestors and adopters.
  • Group III: second degree collaterals (siblings) and third degree (nephews and uncles), ascendants and descendants by affinity.
  • Group IV: fourth degree collaterals (cousins), more distant and strange degrees.

Life insurance is added to the inheritance left by the deceased to their relatives. The total money that is inherited is called «taxable income» and, the more it is, the more taxes are paid.

Domestic partner: grade II or grade IV

It is very important to know that the closest relatives have tax advantages. For example, in some cases the tax base is reduced. That is, it is counted as if less money was inherited so that less is paid. For example, when receiving life insurance, automatically subtract 9195, 45 euros for family members of groups I and II . Each community has its own peculiarities that it is very important to know.

After applying these reductions, the tax is calculated based on the remaining tax base (between a 7, 65% and a 34%, depends on the community and the money). To the given figure, apply the multiplier coefficient . It is data that varies according to the degree of kinship, the autonomous community and the pre-existing heritage of the heir. For example, if you have to pay 3000 euros of tax and the multiplier coefficient is 1, 05, the final figure will be 3105 euros.

However, after doing all these calculations, there are autonomous communities that have large bonuses . In many cases (Andalusia, Extremadura, Madrid …), grade I and II relatives are exempt from 99% of the tax . That is, they will only pay 1% of the previous figure.

For this reason, it is important to know the legislation of the insured's region . The community will determine whether the common-law partner is equated with a spouse (grade II, with large bonuses) or a stranger (grade IV, who will assume the full tax).

A life insurance with all the guarantees

Taxation is one of the most complex aspects of insurance, but it can make a big difference in terms of the money the beneficiary receives. The Treasury can keep a small percentage or claim a much larger portion depending on various factors.

Domestic couples should know if their autonomous community equates them with marriages to be sure that they will not pay more taxes. Likewise, the type of policy chosen also determines what rates must be paid (IRPF or IS). For both reasons, it is essential to have appropriate advice to help choose the best policy for each couple . Otherwise, you would pay to receive a capital that, after paying taxes, would be much less than expected.