Life and Death Insurance: Understanding the Tax Implications

Life insurance is a savings product that also allows you to pass on a lump sum to one or more beneficiaries named in the policy, outside of the estate. 

Upon the policyholder’s death, the invested funds are paid to the beneficiaries and are generally tax-exempt up to €152,500 if the premiums were paid before the policyholder turned 70.
 

If the beneficiary is the policyholder’s surviving spouse or civil union partner, they receive the proceeds of the policy tax-free, regardless of the amount of the proceeds paid out or the policyholder’s age at the time of payment. This tax exemption also applies to the policyholder’s siblings, under certain conditions.
 

If the beneficiary is not the surviving spouse, the policy is subject to taxation. The tax treatment depends on the policy’s effective date, the dates on which premiums were paid, and the policyholder’s age at the time the premiums were paid. The two most common scenarios are as follows: For policies taken out after November 20, 1991, with premiums paid before the policyholder turned 70, a tax exemption of €152,500 applies for each beneficiary, followed by a 20% tax rate on amounts up to €700,000 and a 31.25% tax rate on amounts above that threshold. For premiums paid after the policyholder turns 70, inheritance tax applies to the portion of the premiums exceeding €30,500.
 

In certain cases, the death benefit from a life insurance policy may be subject to estate taxes, for example, if the policyholder did not designate a beneficiary or if the premiums paid are deemed excessive in light of the policyholder’s income, assets, health, and age at the time the policy was purchased and/or the premiums were paid.
 

It is important to draft the beneficiary clause of a life insurance policy carefully and precisely in order to take advantage of the favorable tax treatment offered by life insurance. Upon the policyholder’s death, the proceeds are paid to the designated beneficiaries and are not included in the deceased’s estate, except in specific cases. If the beneficiary is the policyholder’s spouse, civil partner, or—under certain conditions—siblings, they do not owe any tax. If the beneficiary is a third party, the proceeds are subject to a specific tax, except for very old policies.