How much life cover your family needs and naming beneficiaries

Key rules

• Cover amount: Insure what your family needs minus what it already has, not a flat multiple of your salary.
• Beneficiary: You can name an unmarried partner or anyone else, and change the choice later in writing.
• No beneficiary: If you name no one, the money normally goes to your heirs.
• Succession tax: The beneficiary may owe succession tax, and the rules depend on the region.

Size the cover on the gap, not a guess

Insure the gap between what your family would need and what it would already have. Work it out in three steps.

What your family would need:

• Your outstanding debts, such as a mortgage and loans.
• Income replacement for the years until your dependants can support themselves.
• Children's costs, such as education.
• Funeral costs.

What your family would already have:

• Savings.
• Existing life cover, including employer or collective cover.
• Survivors' pensions from Social Security.

Needs minus resources is the amount to insure. A common rule of thumb is 5 to 10 times your annual income. Use it only as a rough cross-check, because it is not an official figure. The calculator below can do the sums for you, and the checklist below lists the steps.

Name your beneficiaries on purpose

You can name anyone: an unmarried partner, a friend, a charity or your children. You can set the beneficiary in the policy, in a later signed written notice to the insurer, or in your will. You can also change it later in the same ways.

If you name no one, the capital normally goes to your heirs. That may not be who you want, and it can slow things down. If you want a designation that you cannot change later, you must waive your right to change it in writing.

Because the payout goes straight to the named beneficiary, it generally does not count as part of your estate. So the fixed shares the law reserves for close relatives ("legítimas") do not normally apply to it. Two exceptions: a court can reduce premiums that look excessive for your wealth or were used to defraud those relatives, and if you name your estate as beneficiary, the money becomes part of the estate. If you have children or other forced heirs and a large policy, ask a notary or lawyer before you decide. Regions with their own civil law, such as Catalonia, Galicia, Navarra and the Basque Country, have their own systems, but the same logic generally applies.

Check the tax before you choose

The beneficiary may owe succession tax (the "Impuesto sobre Sucesiones y Donaciones"). This is a regional tax, so the treatment depends on the region.

• You are the policyholder and the insured person. The beneficiary pays succession tax, with the same rates and reductions as an inheritance. The national baseline reduces the taxable amount by 100% of the proceeds, up to 9,195.49 euros, for a spouse, parents, children and adopted persons. Other beneficiaries, such as an unmarried partner or a friend, are taxed on the general scale. Higher rates can apply depending on their existing wealth and their relationship to you.
• Someone else is the policyholder and is also the beneficiary. The payout is generally taxed as income tax instead.
• Which region applies. Normally it is the region where the person who died was habitually resident, meaning where they lived longest in the previous five years. That region also collects the tax. If the person who died did not live in Spain, the beneficiary's residence decides.

Many regions give large reductions to close relatives, and they change often. Look up your region's reliefs on its tax agency website, or start from the national tax agency's succession tax page, which links to regional rules.

Documents you need

• The life insurance policy contract, where the beneficiary is named, to check who is currently listed.

• A signed written notice to the insurer if you want to change the beneficiary later, or to make the designation irrevocable by waiving your right to change it.

• Your will, if you want to name or change the beneficiary there. A notary can advise if you have forced heirs or live in a region with its own succession rules.

Checklist

• Estimate the income your family would need to replace until your dependants are independent.

• Add children's costs, such as education, and funeral costs.

• Subtract your savings, any existing life cover including employer or collective cover, and expected Social Security survivors' pensions.

• Insure the remaining gap, and treat any rule of thumb such as 5 to 10 times annual income as a rough cross-check only.

• Find out which region's succession tax rules will apply, based on where you live.

Life cover amount calculator for your family

Work it out

What you enter

• Your annual net income, in euros (EUR): Your payslips or last tax return
• Years your family needs income replaced (years): Count the years until your youngest child is independent; the usual rule of thumb is 5 to 10
• Outstanding mortgage balance, in euros (EUR): Your bank app or latest mortgage statement
• Other loans and debts, in euros (EUR): Your loan statements or bank app
• Children's costs such as education, in euros (EUR): Your own estimate of school and university costs
• Funeral costs, in euros (EUR): A quote from a local funeral home
• Savings your family could use, in euros (EUR): Your bank and investment accounts
• Existing life cover, including employer or convenio group cover, in euros (EUR): Your policy documents, or the insurance clause in your convenio (collective agreement)
• Expected monthly survivor and orphan pensions, in euros (EUR): Ask the INSS (Spain's social security office) for an estimate based on your contribution history

Figures used

• Pension payments per year: 12 payments

Worked example (with Your annual net income, in euros 30,000 EUR, Years your family needs income replaced 8 years, Outstanding mortgage balance, in euros 150,000 EUR, Other loans and debts, in euros 10,000 EUR, Children's costs such as education, in euros 20,000 EUR, Funeral costs, in euros 4,000 EUR, Savings your family could use, in euros 20,000 EUR, Existing life cover, including employer or convenio group cover, in euros 30,000 EUR, Expected monthly survivor and orphan pensions, in euros 1,000 EUR)

When the sum misleads

• If the result is 0, your savings, existing cover and pensions already meet your needs.
• Unmarried partners get a survivor pension only if they were registered as a couple at least 2 years and lived together at least 5 years, so enter 0 for pensions if you are not sure.
• Survivor pensions are not guaranteed, so a cautious sum uses a lower pension figure.

Frequently asked questions

Do forced-heir shares apply to life insurance paid to my partner?

Generally no, forced-heir shares (legítimas) do not apply to life insurance paid to a named beneficiary, because the beneficiary receives the money directly under the contract and it is not part of the estate. There are two exceptions: a court can reduce premiums that were excessive for your wealth or used to cut out forced heirs, and the money does count as estate if you name your estate as beneficiary. Regional civil laws such as Catalonia's have their own systems, so ask a notary if you live there.

What happens if I name no beneficiary on my life policy?

If you name no beneficiary, the capital normally goes to your heirs. You can name or change a beneficiary at any time in the policy, in a later written notice or in a will. It becomes irrevocable only if you waive your right to change it in writing.

Which region's inheritance tax applies to my life insurance payout?

The region where you lived at death normally decides, meaning where you spent the longest period of the last five years, and that region also collects the tax. If you were not resident in Spain, the beneficiary's residence is used instead. Check the reliefs on your region's tax agency website, since many regions give large reductions to close relatives.

Is the life insurance payout always taxed as inheritance?

No, it is taxed as inheritance only when you are both policyholder and insured and the beneficiary receives it. If the policyholder is someone other than the insured and is also the beneficiary, the payout is generally taxed as income tax instead. Where inheritance tax applies, close relatives get a national reduction of 100% of the proceeds up to 9,195.49 euros unless the region sets its own.