Life insurance provides your family with critical financial protection in the event of an early death. As a foundational part of a solid financial plan, there are sometimes specific tax benefits for people using life insurance products. But what about life insurance in Japan? Japan has a complex tax system, but with proper planning, you may be able to use your life insurance to reduce your Japanese taxes.
Life Insurance Basics
Life insurance is a financial contract between a policyholder and an insurance provider. The details of the contract are usually described according to the following terms:
- -Policyholder: A policyholder in a life insurance policy is the person who owns and maintains the policy. This individual is responsible for paying the premiums and ensuring that the policy remains active and in force. The policyholder can make decisions regarding the policy, such as choosing the coverage amount, selecting beneficiaries, and updating personal information as needed.
- -Life Assured: The life assured is the individual whose life is covered by the insurance. In the event of the life assured’s death, the policy will pay out the death benefit to the designated beneficiaries. The life assured’s age, health, lifestyle, and other factors are taken into account when determining the premium and coverage amount for the policy. This person is usually also the policyholder.
- -Premiums: Premiums are payments made to insurance companies in exchange for coverage of the life assured. Rates vary based on factors such as age, health, and policy type – all of which impact the likelihood of when and if the insurance company will have to pay out the benefits of the policy.
- -Death Benefit: A life insurance death benefit is a sum of money paid out to the beneficiaries of a life insurance policy upon the death of the insured person (the “life assured”). It is designed to provide financial protection and support for the insured’s loved ones, helping them cover expenses such as funeral costs, outstanding debts, mortgage payments, and daily living expenses.
- -Beneficiary: A beneficiary in a life insurance policy is the person or entity designated by the policyholder to receive the death benefit upon the death of the life assured. Beneficiaries can be individuals, such as family members, friends, or business partners, or they can be organizations, such as charities, trusts, or nonprofit entities. The policyholder can name one or multiple beneficiaries and may also specify the percentage of the death benefit each beneficiary should receive.
Within the life insurance contract, the life insurance provider offers a death benefit to the beneficiaries of the life assured upon the death of the life assured in exchange for consistent payments by the policyholder.
In many countries, the premiums paid to life insurance can be deducted from the policyholder’s income tax. In Japan, however, this is only possible if the policyholder is the same as the life assured and that person is paying the premiums.
Using Life Insurance To Reduce Your Japanese Taxes
If you are the policyholder of a life insurance policy in which you are also the life assured, you can claim deductions on your income tax according to the amount you have paid in insurance premiums. The maximum deduction is 120,000 yen, with the specific deductible amounts depending on whether the policy is new (started on or after January 1, 2012) or old (started before December 31, 2011).
For new policies, the deductible amounts are calculated based on the following:
- -Annual premium up to 20,000 yen: Entire premium paid
- -Over 20,000 yen and up to 40,000 yen: (Premiums paid x 1/2) + 10,000 yen
- -Over 40,000 yen and up to 80,000 yen: (Premiums paid x 1/4) + 20,000 yen
- -Over 80,000 yen: 40,000 yen flat rate
For old policies, the deductible amounts are calculated based on the following:
- -Annual premium up to 25,000 yen: Entire premium paid
- -Over 25,000 yen and up to 50,000 yen: (Premiums paid x 1/2) + 12,500 yen
- -Over 50,000 yen and up to 100,000 yen: (Premiums paid x 1/4) + 25,000 yen
- -Over 100,000 yen: 50,000 yen flat rate
Premiums paid are the amounts after deducting surpluses and rebates received during the year. Deductions depend on the main coverage of the insurance contract, and surpluses or rebates are distributed proportionally based on the premiums paid for the main contract and rider.
For those with both new and old contracts, deductions are calculated separately for general life insurance and individual pension premiums. If the deducted amount from old contracts exceeds 60,000 yen, the maximum deduction for new contracts is 40,000 yen. If the deducted amount from old contracts is 60,000 yen or less, the total amount calculated for new and old contracts cannot exceed 40,000 yen.
When The Policyholder Is Not The Life Assured
If the policyholder is not the life assured, but the beneficiary, the tax implications become more complicated. Potential tax deductions can no longer be applied to income tax, but may be applied to the death benefit payout depending on the circumstances. Here are the basics:
- 1. When the policyholder and the beneficiary are the same person, the premiums paid can be deducted from the death benefit payout. The tax classification depends on the method of receipt: temporary income for lump-sum payments or miscellaneous income for annuity payments.
- a. Lump-sum death benefits are treated as temporary income. If there is no other temporary income, the taxable amount is calculated by subtracting the paid premiums from the total insurance payout and then deducting a special temporary income deduction of 500,000 yen. The taxable amount is half of the remaining sum and is subjected to marginal income tax rates.
- b. Annuity death benefits are classified as miscellaneous income, excluding public pensions. The taxable amount is the difference between the annual pension received and the corresponding insurance premiums. Income tax is generally withheld upon pension receipt.
- 2. When the beneficiary is separate from the policyholder and the life assured, the death benefit will be taxed as an inheritance or a gift. In this case, the premiums paid cannot be applied to tax deductions upon receiving the death benefit, and the beneficiary may be subject to substantial taxes on the received benefit.
Tax Planning For Domestic Vs. International Life Insurance
It is important to note that non-Japanese insurance policies do not qualify for standard tax deductions in Japan. However, despite this limitation, many international families still opt for international insurance over domestic insurance for several reasons.
- -Higher death benefit relative to cost: International insurance policies often provide a higher death benefit in comparison to their domestic counterparts. These higher benefits may exceed the value of the tax deductions offered on the premiums of domestic policies, making international insurance more appealing for foreign people living in Japan.
- -English language support: International insurance policies are more likely to provide customer support and documentation in English, making it more accessible for non-Japanese speakers. This can be a crucial factor when dealing with complex insurance terms and conditions.
- -Internationally portable: International insurance policies typically offer global coverage, ensuring that policyholders are protected regardless of their location. This is particularly beneficial for people who travel or relocate frequently or have plans to move back to their home or other country in the future.
- Beneficiaries living overseas: International families often have beneficiaries who live outside of Japan and may not speak Japanese. International insurance policies can cater to these situations, providing support in the beneficiary’s native language and making it easier for them to receive their benefits.
- -Benefits paid in major currencies: International insurance policies often offer the option to receive benefits in various currencies such as USD, GBP, or EUR. This flexibility can be advantageous for people living abroad who wish to repatriate funds to their home country or convert benefits to their preferred currency.
- -Tax planning opportunities: Although international insurance policies do not offer tax deductions on premiums, there may be potential tax planning strategies that can help reduce the tax burden on the death benefit. By working with a financial advisor or tax consultant, policyholders can explore different methods to maximize their benefits and minimize the tax implications.
While domestic insurance policies may offer tax deductions on premiums, international insurance policies provide a range of benefits that can outweigh this advantage for internationals in Japan. By considering factors such as language support, portability, and tax planning opportunities, international families can make an informed decision on the best insurance policy to suit their unique needs.
Given the complexities of Japanese tax laws, it’s essential to plan carefully if you intend to use your life insurance policy to reduce taxes. Part of this planning should involve a trusted financial adviser. An experienced professional can help you:
- -Assess your financial goals and needs, and propose appropriate insurance policies and determine whether domestic Japanese or international cover makes sense for you and your family.
- -Clarify the tax deductions available for your insurance premiums, regardless of whether your policy is new or old.
- -Establish the most tax-friendly approaches for obtaining death benefits for your loved ones.
- -Consistently monitor changes in your financial needs and circumstances over time and adjust your plan accordingly