For many families, purchasing life insurance is one of the most critical decisions to protect their family’s future. However, when purchasing a life insurance policy, there are often questions regarding premium payments and tax treatment. In this article, we will delve into the tax treatment of life insurance policies, mainly focusing on cases where the policy and premium payments differ between married couples, i.e., where the policyholder and the premium payer differ.
For example, the wife is the policyholder of a life insurance policy, and the husband pays the premiums. Is the husband entitled to a deduction for life insurance premiums in this situation? The answer to this question is based on various tax rules, but it is possible to qualify for the deduction for life insurance premiums if certain conditions are met.
In this blog, we will explain the key points in the payment and tax treatment of such life insurance premiums through specific case studies in an easy-to-understand manner. We will also provide detailed information on tax law provisions to be aware of and the procedures required to receive a deduction for life insurance premiums. Correctly understanding the relationship between life insurance and taxation is very important as part of intelligent family budget management. Through this article, you will be better informed to protect your family’s future better.
Principles of Life Insurance Premium Deduction
Overview
The deduction for life insurance premiums is a system that allows the amount spent for insurance to be deducted from income tax calculations to calculate taxes owed. The insurance covers life insurance premiums, long-term care medical insurance premiums, and individual annuity insurance premiums.
Life insurance and other types of insurance may differ in terms of the policyholder, the payer of the life insurance, and the person covered by the insurance. The payer is supposed to pay for this life insurance. However, as a practical matter, if you live together, there may be ambiguity as to who pays for the life insurance. It is especially true if you have a joint account. In this case, it may be possible to consider which party is responsible for paying the insurance premiums to their advantage or disadvantage.
The Law
The law is written as follows.
(1) The portion of the insurance premiums or premiums (in the case of those pertaining to the contracts listed in paragraph (5) items (i) to (iii) inclusive, a certain amount of insurance money, mutual aid money or other benefits based on survival or death (hereinafter in this Article referred to as “insurance money, etc.”)) pertaining to a new life insurance contract, etc., which the resident undertakes to pay in each year (iii) in the case of those pertaining to a contract listed in item (iii), those pertaining to the portion that promises to pay a certain amount of insurance money, co-payment or other benefits (hereinafter referred to as the “survival and death portion” in paragraph (3)) based on survival or death (Hereinafter referred to as the “new life insurance premiums” in this paragraph and the next paragraph.) (iii) The amount of the premiums or premiums pertaining to the old life insurance contract, etc. (excluding the old individual annuity insurance premiums prescribed in paragraph (3) and any other premiums specified by a Cabinet Order) or the old life insurance contract, etc. Hereinafter in this paragraph referred to as the “old life insurance premiums”). (3) Where a resident has paid insurance premiums or premiums (excluding the old individual annuity insurance premiums prescribed in paragraph (3) and any other premiums specified by a Cabinet Order) pertaining to an insurance contract, etc., the amount specified in each of the following items shall be deducted from the gross income amount, retirement income amount or forest income amount of the resident for the relevant year according to the category of case listed in the relevant items
Article 76(1) of the Income Tax Act (所得税法第76条1項)
Article 76(1) of the Income Tax Act
Key to tax reduction
Payer’s attention
The person who pays the premiums does not necessarily have to be the principal. In this sense, premiums can be organized and deducted between husband and wife.
Specifically, they can be organized in this way.
Payment of insurance premiums
- A life insurance contract, etc., shall be deemed to be a life insurance contract, etc., if all of the beneficiaries of the insurance, its insurance benefits, etc. are the person who pays the insurance premiums, etc. or his/her spouse or other relatives (Article 76, Paragraph 5 of the Income Tax Act).
- In the case of an individual annuity insurance contract, etc., the person who makes the payment or his/her spouse (Article 76, Paragraph 6 of the Income Tax Act)
Image of the deduction for life insurance premiums
Let us calculate the deduction for life insurance premiums based on the “new life insurance premiums. Suppose you paid 100,000 yen per year. In this case, the deduction for income is 40,000 yen.
The deduction categories for the deduction for new life insurance premiums are as follows.
| Annual premiums paid, etc. | quota |
|---|---|
| Less than 20,000 yen | All premiums paid, etc. |
| Over 20,000 yen but less than 40,000 yen | Premiums paid, etc. x 1/2 + 10,000 yen |
| More than 40,000 yen but less than 80,000 yen | Premiums paid, etc. x 1/4 + 20,000 yen |
| Over 80,000 yen | 40,000yen |
In this case, 40,000 yen is deducted from the income of 4,000,000 yen.
The tax rate is 20% for income between 3,300,000 yen and 4,000,000 yen, according to the tax quick calculation table.
| Amount of taxable income (rounded down to the nearest thousand yen) | Rate rate | Quota |
|---|---|---|
| Less than 1,950,000 yen | 5% | 0 yen |
| Over 1,950,000 yen but less than 3,300,000 yen | 10% | 97,500 yen |
| More than 3.3 million yen but less than 6.95 million yen | 20% | 427,500 yen |
| More than 6,950,000 yen but less than 9,000,000 yen | 23% | 636,000 yen |
| More than 9 million yen but less than 18 million yen | 33% | 1,536,000 yen |
| More than 18 million yen but less than 40 million yen | 40% | 2,796,000 yen |
| Over 40 million yen | 45% | 4,796,000 yen |
This amount will reduce income tax by 8,000 yen based on the following formula.
Pay it on the higher income.
The tax rate of 20% was applied, but the tax rate is 5% if your income is less than 1,950,000 yen.
If your spouse’s income exceeds that range, the reduced income tax is 2,000 yen.
As a result, the person with a higher income will pay lower income tax.
Comparison of Resident Tax
The inhabitant tax rate is 10%. Whichever person pays less will pay the same amount, a reduction of 4,000 yen.
Temporary income and gift tax
By paying insurance on one side, income tax can be reduced. However, there is a caveat.
Depending on who pays the premiums, the treatment of one-time income and gift taxes for income tax purposes will vary. Depending on who pays for the burden, the insurance proceeds may be considered a gift when you receive them. It is essential to note which insurance policies are not problematic.
In summary: Protect your finances with intelligent tax-saving strategies.
It may be a small amount, but to the extent that you can save tax, you should also reduce your income tax. Be careful not to be arbitrary in doing so. If you have any concerns about tax treatment, please get in touch with us.
