This article discusses the taxation of unit-linked insurance in different situations:
Unit-linked insurance and taxation – good to know
- Savings from unit-linked insurance are taxed when you withdraw the savings.
- OP Unit-linked Insurance is a unit-linked endowment insurance policy with assets that comprise the related investments you have made, and gains based on any increase in value of the investment products you have selected.
- Unit-linked insurance is an insurance wrapper through which you can choose various investment products. The insurance wrapper allows you to change investment options within the insurance policy without any tax consequences.
- The endowment insurance also includes life insurance. This means that in the event of your death, your savings are paid to the beneficiary of your choice, who may then use the insurance benefit to cover expenses as they wish, for example, by paying back loans and inheritance tax.
Taxation of endowment insurance – The return is always taxed as capital income when withdrawing funds
The capital amount, meaning the contributions paid to the insurance, is tax-free when paid out to the insured themself. Returns on unit-linked insurance are taxed as capital income. However, returns of an endowment insurance policy are capital income subject to taxation only at the time at which you withdraw funds from your insurance.
This means you can change investment options within the insurance without needing to pay any taxes for the change. When you withdraw funds, the taxation of the unit-linked insurance, meaning the endowment insurance, is determined based on how much of the amount withdrawn consists of returns. The insurance assets can be surrendered partially or entirely. A partial surrender always consists of capital and returns. Contributions you have paid to the insurance are not deductible from your personal taxation.
Unit-linked insurance falling due – Next of kin as beneficiaries
When the unit-linked insurance falls due, the capital is taxed according to gift tax if it is paid to a next of kin according to a beneficiary clause. Gift tax is not payable if, combined with other gifts from the same benefactor, the capital amount paid from the insurance does not exceed 4,999 euros in any three-year period. The return accrued is also taxable capital income for next of kin.
Next of kin include the following:
- insured person's spouse,
- insured person's heirs,
- adopted child and their direct heir,
- foster child and a spouse's child.
Under tax legislation, cohabitant partners are treated as spouses if they have previously been married to one another or have had a child together.
If insurance assets are paid to a person other than yourself or your next of kin, the entire assets paid constitute taxable capital income.
Taxation of the death benefit
Unit-linked insurance also includes life insurance. If you die during the validity of the policy, the insurance assets will be paid in full to the beneficiary you have selected as a death benefit. The beneficiary clause bypasses any last will and testament if the beneficiary is not a death estate and affects whether the unit-linked insurance is taxable as inheritance tax or capital income tax. The death benefit is paid to the insured person's death estate if the death estate is designated as the beneficiary or the beneficiary clause has lapsed because there are no beneficiaries.
The tax treatment of death benefits of endowment insurance depends on the beneficiary as follows:
- If the beneficiary is the insured’s next of kin, the death benefit is subject to inheritance tax.
- If the beneficiary is not the insured’s next of kin, the death benefit is taxed as capital income.
- If the death benefit is paid to the insured person's death estate, it is considered part of the assets of the death estate. Any property received from a death estate is subject to inheritance tax, regardless of the family relationship between the deceased and the heir or the beneficiary under a will.
Tax deduction of losses from saving through insurance
If your insurance ends with a deficit, you can deduct the losses of your endowment insurance from your taxes on the year the insurance contract ended. A loss is incurred if the amount paid into the insurance is greater than the amount paid out during the contractual period. The loss is deductible from taxable capital income and taken into account when confirming losses in the capital income category. A tax deduction on a loss can be carried over for the subsequent 10 years and claimed for capital income arising in those years. However, it is not taken into account when confirming a deficit in the capital income category.
The information on taxation is based on tax legislation valid as of 1 January 2023. Taxation of insurance is subject to change and complies with the tax legislation in force at any given time.
