Because it is a thorough process, many people are in doubt as to whether income tax is impacted by the purchase of life insurance.
In summary, we can say that life insurance does not influence on the income tax return. But some products represent an exception
Impact of Life Insurance on Income Tax
As we said, in most situations, the contracting of life insurance does not impact the Income Tax. This is because it is not necessary to inform you about insurance in the tax declaration.
There is not even space available to fill this information in the field “Goods and Rights” – which would be the appropriate place to inform the IRS regarding the existence of insurance.
Therefore, the insurance payment is not an expense that can be deducted from the income tax calculation basis. In addition, the purchase of the product generally does not generate an abatement in the amount to be paid.
Whoever receives the benefit should also not pay income tax on the amount. However, it is necessary to declare the receipt of capital.
The only exception in this context are products that have survival coverage clauses that generate income. Next, we will better address this modality.
Insurance with survival coverage clause
The insurances that have this clause are the only exceptions because they are considered a financial investment and, like a private pension plan, they must be declared to the tax authorities. One example is redeemable life insurance.
In this situation, the income tax will only be charged on income. The rate can be fixed at 15% of insurance gains or it can follow a regressive table, with the fluctuation of rates according to the asset accumulation terms, as indicated below:
- 35%: term less than or equal to 2 years;
- 30%: between 2 and 4 years;
- 25%: between 4 and 6 years;
- 20%: between 6 and 8 years;
- 15%: between 8 and 10 years;
- 10%: term over 10 years.
It is also worth noting that the choice between the fixed and variable rates is made when contracting life insurance. Therefore, if you are interested in making redemptions in the short term (less than 10 years), prefer the fixed rate. Otherwise, choose the variable alternative. If you do not make any choice, the collection of the fixed 15% will automatically be valid.
Declaration of insurance premium in Income Tax
There are not many secrets regarding this topic. The capital value of the product as compensation must be made within “Exempt and Non-Taxable Income”. This is because the amounts received as indemnity do not cause an increase in equity, but rather an asset recovery.
As we have seen, life insurance does not impact the income tax return, except in one situation. It is important to know these issues so that you are not surprised at the time of filing and do good tax planning – which will help you pay fewer taxes legally.