Financial IQ: Taxes on life insurance policies

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Financial IQ Philippines Quick Hit(s):

Irrevocable insurance is 100% tax exempted.  Revocable insurance is suject to estate tax.


Taxes on life insurance policies?


My husband and I have several ordinary life insurance policies, all with Insular Life, except for one. We are now senior citizens with adult and economically independent children. We now want to make sure that the proceeds of our policies will not be subjected to any kind of tax so it will be sufficient to cover our respective estate taxes. My parents did not have any life insurance coverage and it was difficult for me to come up with my share of the estate taxes then, especially since it was during the Asian financial crisis. We want to provide our children with enough insurance money to cover whatever estate taxes they will incur in the future.


Justice and Eric Mondragon, Loyola Grand Villas, Quezon City


Answer


Thank you for insuring with Insular Life. You have made the right decision as your insurance policies will surely take care of your estate planning concerns. As to your query, please allow us to respond here in a general way for the benefit of the other readers. However, we shall provide you with specific answers to your questions through your private e-mail.


On your questions about life insurance taxation, two possible taxes come to mind: one is the income tax on the part of the beneficiary of the policy, and the other is the estate tax.


Under Section 32 (B) (1) of our National Internal Revenue Code (NIRC), “the proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured…” are not included in the gross income and therefore exempt from income tax. However, if the proceeds are left with the insurer to earn interest, such interest payments shall be included in the gross income of the beneficiary subject to income tax.


On the other hand, life insurance proceeds may be subject to estate tax under certain conditions. Section 85 (E) of the NIRC states that even if the proceeds are payable to the beneficiary upon the insured’s death, such amount shall be considered as part of the deceased-insured’s estate subject to estate tax when such beneficiary was designated as “revocable.” This means that the insured-policyholder still has complete “control” over the policy, such that he can make any policy transaction all by himself (without the consent or approval of the beneficiary), especially for the change, addition or removal of the beneficiary. Other transactions could be the securing of a policy loan or policy surrender to get cash values. If there is no beneficiary designation, it shall be presumed that the designation is “revocable.”


The proceeds shall likewise be subject to estate tax if these are payable to the executor or administrator of the insured’s estate and, of course, if proceeds are payable to his estate, even if the designation was irrevocable. If no beneficiary was named, most insurance policies state that the proceeds shall be paid to the insured-policyholder’s estate, and therefore subject to estate tax as discussed above.


It is when the beneficiary designation is “irrevocable” that the insurance benefit will not be subject to the estate tax. The irrevocable beneficiary designation removes from the insured-policyholder “control” over the policy so that all policy transactions affecting the interest of the irrevocably designated beneficiary would require the latter’s approval. With this, the proceeds are not considered part of the deceased-Insured’s estate, and therefore not subject to the estate tax.

http://www.philstar.com/Article.aspx?articleId=617629&publicationSubCategoryId=82

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