Life policy: tax legislation and concessions in progress for those who decide to invest in a product of this type. Let’s find out more on the subject.
Are you ready to “sweat” with us between annual rates, stamp duty on the reporting of financial-insurance products and surroundings? It is not that complicated, you just need an instruction manual on the tax regime of the life insurance policy and that, don’t worry, we will provide it to you in this insurance blog article.
Life policy: tax legislation in force
If you are considering investing in a life insurance policy, you are on the right track. The tax regime of these products is very interesting due to their particularities. Let’s find out what are the tax breaks and taxes concerning life products, in particular life policies.
The tax treatment of insurance products generally concerns the capital gain (ie the increase in value) that an investment generates. In this case, it is a life policy. Nothing to worry about: let’s try to understand together, in the simplest way possible, what is the tax legislation in force for life policies.
Substitute tax for income taxes: let’s talk about capital gains
The substitute tax for income tax, also known as the tax on financial income, is applied to capital income and has an impact on all life products, including life policies.
The insurance company withholds the tax on the sums paid to the customer if there is a need to pay the substitute tax. In short, it acts as a withholding agent.
How is the taxable amount determined? It is calculated on the financial return accrued from the life product in the contractual period. Let’s talk about capital gain.
The first thing to understand is when you have to pay taxes on life insurance policies. The answer is very simple: when they generate capital gains, or when the premium is collected, which can be at the time of the death of the person who subscribed to the life product or when it is considered a “propitious” moment (i.e. when you deem it appropriate to withdraw the capital according to the contractual provisions of the life policy).
When you collect the capital, then you have to pay the taxes on the life insurance policy.
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Tax on capital gains accrued on the life policy
The capital gain, in general, has relevance for tax purposes because it indicates the increase in the person’s ability to pay (at least that’s what Wikipedia says!). Seriously, capital gains are not taxed based on the personal income tax but generally by direct taxes and in some cases, they are taxed only if provided for by a specific law or part of it.
The tax on the capital gain accrued on the life policy is calculated based on the following rates:
- 12.5% until 31 December 2011
- 20% from 1 July 2012 to 30 June 2014
- 26% from 1 July 2014.
However, if part of the capital gain derives from a government bond, the rate to be applied on this specific “slice” of income always remains 12.5%.
The total tax rate to be applied to the accrued capital gain derives from the calculation of the rates of public and private investments (such as a life product, in this case).
Life insurance contracts provide for the disbursement of capital either in the event of the death of the insured person (therefore the premium is assigned to the beneficiary of the life policy) or at the expiry of the contract if the insured is still alive. The contractual condition for which the premium can be redeemed before expiry is rarer, but not that much.
In none of the three cases, the liquidated capital is subject to an income tax return and not even to inheritance tax.
If there is a premature death (ie the circumstance in which the beneficiary is missing before the insured party) from 2015 the capital is subject to taxation on the capital gain, as we explained earlier. Let’s be clearer: if you stay alive and you are the insured person, you will have to pay taxes on the part of the capital corresponding to the total life insurance premium.
The annuity does not constitute personal income tax so it is not taxed as income. The annual revaluation of the annuity (capital gain) is taxed at 26% except in the case of annuities deriving from public securities or equivalents which are taxed at 12.50%.
The stamp duty on the life insurance policy is applied annually on the value of the capital accrued over the previous year. In short, it changes year by year based on how much you have earned compared to the initial capital invested in your life policy.
Stamp duty cannot in any way be applied to life insurance products that are part of what is called class I, that is, those who invest in the separately managed account. In this case, the insurance company that owns the contract independently calculates the taxes that the natural person (a freelancer, for example) owes to the state on the accrued capital, retains it by communicating the amount and paying it to the Treasury independently.
Stamp duty cannot also be applied to life insurance if it was signed before 31 December 2000.
The stamp duty on the life insurance policy has changed over time:
- by 0.10% from a minimum of € 34.20 to a maximum of € 1,200 at 31 December 2012
- 0.15% from a minimum of € 34.20 to a ceiling of € 4,500 at 31 December 2013, only for legal persons
- 0.20% and a ceiling of 14 thousand euros until 31 December 2014 for legal entities only.
Deductibility of premiums paid for life policies
There is a first difference to be made between deductible and deductible from declared income.
The deductibility concerns the sum subtracted from income before calculating taxes.
The deductibility, on the other hand, concerns the tax to be paid once the taxable income has been obtained. The deductible sums are subtracted directly from what you owe in the form of tax.
In short, how is the deductibility of life insurance policies calculated? You can deduct up to 19% of the premium paid each year for a life insurance policy for the risk of death, disability (not less than 5%), or in case of non-self-sufficiency (condition for which one is not able to lead an independent life to carry out the most common daily activities).
The paid life insurance premium is deductible, unlike other investment and savings instruments. Deductibility is allowed for products with a risk premium (in the event of death, for example).
The policyholder of the life policy has the right to a deduction (in the year in which the premium was paid) to a deduction on personal income tax within the limits of current legislation.
530 euros is the figure that since 2014 has been imposed by law as a limit on the deductibility of the premium of a life policy for the risk of death and disability and 1,291 euros for non-self-sufficiency.
Certainly, the tax legislation of life policies (and of life products, more generally) is very advantageous. The tax breaks and taxes that are in force today for life products are certainly an advantage for those who want to invest and save. Give us a little thought!
Do you need further clarification? Feel free to write us in the comments!