How Is Foreign Currency Insurance Taxed In Japan?

how is international life and investment insurance taxed in japan?

Many foreign residents of Japan find that international insurance plans – including life, disability, and other policy variations – better suit their needs than their domestic Japanese insurance counterparts. One of the many benefits of international and overseas insurance options includes the ability to choose to pay premiums and receive benefits in different currencies. But – as always – this can make things more complicated when it comes to Japanese taxes on insurance benefits… 

The Basics: How Japan Taxes Insurance Payments in Japanese Yen

The Basics: How Japan Taxes Insurance Payments in Japanese Yen

In Japan, the taxation approach for received insurance payouts is calculated based on the insurance premium amounts paid, and the benefits received, according to the type of insurance. While these rules can get a little confusing, the good news is that as long as premiums and benefits are paid in Japanese yen, the treatment is consistent – even if you have international or foreign insurance.

 

Depending on the scenario, payouts may be subject to different types of taxes. This can include inheritance tax, income tax (either as temporary income or miscellaneous income), gift tax, and resident tax. The tax type and rate often depend on the type of insurance and the relationship between the insurance premium payer, the insured, and the “beneficiary” (receiver of the payout).

Type of Taxes: Death Benefits, Disability, Hospitalization, Maturity 

While some of the taxation rules for insurance benefits are fairly straightforward, others can get quite complicated. Tax laws regarding death benefits and maturity insurance money are particularly complex. As such, it’s a good idea to consult your adviser before settling on a tax strategy, but here are the basics:

  • Death Benefits – The tax treatment for life insurance is dictated by the relationships between the premium payer, the insured, and the beneficiary. The rules work as follows:
    • If the insurance premium payer is the same as the insured but different from the receiver of benefits (e.g. if the husband is the insured and pays the premiums and the wife is the beneficiary): the benefit is subject to inheritance tax upon receipt. 
      • Japanese Taxes on Foreign Currency Insurance
    • Note: In the case of a pension, the benefit is subject to inheritance tax when the reason for payment occurs (e.g. upon the death of the pensioner)
    • If the insurance premium payer and the receiver of benefits are the same, but the insured individual is different (e.g. if the husband pays the premiums and is designated to receive benefits and the wife is the insured individual): the benefit is subject to both income tax (classified as temporary income) and resident tax.
    • If the insurance premium payer, the insured individual, and the receiver of benefits are all different (e.g. the payer is the husband, the insured is the wife, and the receiver is their child): the benefit is subject to gift tax when the reason for payment occurs, and is subject to income tax (classified as miscellaneous income) and resident tax when the benefit is received.

You may have noticed that, depending on the circumstances, a death benefit payout can be subject to a number of different taxes. The good news is that the law protects you from double taxation, so the portion of a death benefit that is subject to inheritance tax or gift tax will not be subject to income or resident tax. Unfortunately, high inheritance and gift tax rates in Japan mean these compounding taxes could still eat away a significant portion of the benefit payout. This is yet another reason to discuss your insurance strategies with your financial adviser.

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  • Insurance Money At Policy Maturity – The tax implications for insurance money paid at maturity also vary depending on the relationships involved. Fortunately, these rules are less complex than those for death benefits. They work as follows:
    • If the insurance premium payer and the insured are the same person: the benefit is subject to both income tax (classified as temporary income) and resident tax upon receipt.
    • If the insurance premium payer and the insured are different people (e.g. the husband is the premium payer and the wife is the insured): the benefit is subject to gift tax at the start of the payment and is subject to both income tax (classified as miscellaneous income) and resident tax upon receipt.
Insurance Money At Policy Maturity Japan

Once again, laws prevent double taxation, meaning any portion of the benefit that is subject to gift tax will not be taxed again under income and resident tax.

The laws around other insurance payouts are much more straightforward. Insurance payouts due to severe disability, hospitalization, or surgery are not subject to tax as long as the beneficiary is one of the following:

  • -The insured
  • -The spouse of the insured
  • -Any relative living in the same household as the life assured

If an individual receives a surrender value from their insurance policy (such as a cancellation refund), this money will also not be taxed as long as it is equal to or less than the amount paid in premiums. If the amount exceeds the total amount they’ve paid in premiums, the difference is subject to both income tax (classified as temporary income) and resident tax.

Premiums and Payouts in Foreign Currency: What Changes?

While the foundational tax structure remains consistent, Japanese tax treatment of insurance premiums and payouts does change when transactions are carried out in foreign currencies. There are nuanced considerations for conversion rates, potential foreign exchange gains or losses, and specific telegraphic transfer rates when premiums and payouts occur in foreign currencies. Here are the basics:

  • Tax Equivalence: Even if insurance is denominated in a foreign currency, the foundational tax treatment is the same as insurance denominated in Japanese yen. This ensures consistency in tax structure regardless of currency denomination.
  • Premiums and Payouts in Foreign Currency: What Changes?
  • Conversion to Japanese Yen: If insurance premiums are paid or benefits are received in a foreign currency instead of Japanese yen, these amounts need to be converted into Japanese yen for tax purposes. The conversion rate is determined by tax law.
  • Foreign Exchange Gains and Losses: When insurance premiums are paid using foreign currency deposited in a foreign currency deposit, there’s a recognition of foreign exchange gains or losses. This is calculated based on the difference between the exchange rate on the day the deposit was made and the rate on the day the insurance premium was paid. If there’s a depreciation in the exchange rate leading to a foreign exchange gain, it becomes subject to income tax (miscellaneous income) and resident tax.
  • Receiving Insurance Money in a Foreign Currency: When insurance benefits or surrender value is received in a foreign currency, taxpayers must file a final tax return or pay taxes using the amount converted to Japanese yen. 
  • Insurance Premium Deductions: Life insurance premium deductions are also assessed in yen. The amount of insurance premiums, when converted into yen, becomes the “amount equivalent to the insurance premiums paid to obtain that income” during taxable income computation.

The conversion of foreign currencies to Japanese yen for the purposes of insurance taxation involves specific reference dates and exchange rates. These dates and exchange rates are determined by which tax applies to the benefit. The rates are categorized as TTM, TTB, and TTS, and operate as follows:

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  • TTM (Telegraphic Transfer Middle Rate): 

This is the standard rate used by financial institutions when customers buy or sell foreign currencies. Life insurance premium conversions are conducted using TTM. It is generally determined as the average value between TTS and TTB. For tax purposes, TTM is frequently used as the reference rate for converting foreign currency transactions into yen. As TTM is an average rate, it may not reflect the exact rate a foreign resident received or paid for a currency exchange, potentially leading to discrepancies in calculated yen values for tax purposes.

  • TTB (Telegraphic Transfer Buying Rate):

This rate applies when a financial institution is buying foreign currency from a customer. For insurance subject to inheritance or gift tax, the conversion uses the “date of payment reason” and applies the Final Telegraphic Transfer Buying Rate (TTB). 

  • TTS (Telegraphic Transfer Selling Rate):

This rate is used when a financial institution sells foreign currency to a customer. From the customer’s perspective, it’s the rate applied when exchanging Japanese yen for foreign currency. Thus, the TTS rate will be used if a foreign resident needs to pay insurance premiums in a foreign currency and buys that currency using yen.

Crafting Your International Insurance Strategy

As you can see, while Japanese tax law is consistent in dealing with domestic and foreign insurance plans, there are still a number of complexities that can impact the effectiveness of your insurance strategy. Beyond the numerous tax rates that can apply to a single insurance payout, exchange rate fluctuations can further impact tax liabilities. These challenges have caused headaches for countless foreign residents of Japan.

 

Fortunately, there are people who can guide you through these tax laws. By consulting with a professional to craft your financial strategies, you can alleviate the stress and frustration of dealing with complex Japanese tax laws. Why leave yourself at the mercy of Japanese tax law? Get in touch with a financial adviser and you can minimize your insurance liabilities and ensure financial security for yourself and your loved ones. 

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