How is life insurance taxed?

Life insurance can cover many different risks, including the death, disability or illness of the insured. Usually, the insurance company agrees with the policyholder to pay a predetermined capital, an income or a benefit to the persons designated by the client, in exchange for a premium (the price of the insurance). Regarding the tax treatment of benefits, the beneficiaries will have to pay taxes corresponding to the collection of each of these insurances.

Up front, we may have to pay two different tributes: the Personal Income Tax (IRPF) and the inheritance and donations tax (ISD). If the beneficiary of the insurance and the person who hires it are the same person, IRPF must be paid, while If the person who collects the money is a different person from the person who hired it, inheritance and gift tax must be paid. The ISD applies to those titles, assets, participations or cash that reaches the hands of a person without having to contribute anything in return, that is, receiving money for free.

However, there are many particular cases and we may have to turn to a professional to advise us when it comes to catching up with the Treasury. For example, if our spouse dies and we both had contributed to pay the life insurance, the amount we will receive is divided 50%: a Half is subject to inheritance and gift tax and the other half will pay personal income tax.

Pay before you get paid

If we are the recipient of third party life insurance, we will have to pay inheritance and gift tax before you can receive the money. It is a direct and personal tax for which the person who receives the benefit is obliged to pay it, whether it is a policy that is charged in the form of income, such as one received with cash

A period of up to six months to pay this tax from the time of death of the person who has taken out the insurance. Now, the amount to be paid is the faculty of the different Autonomous Communities, since it is a tribute that is assigned by the State to the autonomous administrations. So, it is up to them to determine the percentage they retain. Some, for example, have established tax benefits that reduce the effective amount of this tax by up to 99%, depending on the particular case. Thus, the final taxation of the money received will depend on the tax residence where life insurance has been contracted. In this calculation of the amount to be paid, the degree of kinship of the deceased person.

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