[Practical Finance] How About Tax Savings with Insurance... Year-End Insurance Tax Benefit Tips

Pension Savings Insurance Year-End Tax Deduction Amount Increase Proposed
Pension Insurance Allows Tax-Exempt Insurance Gains

[Asia Economy Reporter Changhwan Lee] Insurance is fundamentally purchased to prepare for risks that can occur anytime and anywhere. Among them, life insurance plays a role in covering various risks that can be encountered at different stages of life, such as leaving family behind due to death, sudden illness or injury, or preparing for old age.

Besides coverage, another function of insurance is tax savings. As the year-end approaches, we looked into the various tax benefits consumers can receive when subscribing to insurance company products.

Tax-Exempt Benefits of Pension Savings Insurance

Life insurance also includes 'savings-type insurance' that has a savings function similar to bank fixed deposits or installment savings.

A representative savings product is pension savings insurance. Pension savings insurance is a product where a portion of income during economically active young years is accumulated and managed, and then a pension is received after retirement at a certain age.

This product offers a tax credit benefit on part of the paid premiums during year-end tax settlement. Tax credits can be received on pension savings insurance premiums paid over the past year, with a maximum annual deduction of up to 4 million KRW.

For example, if the annual earned income is 55 million KRW (comprehensive income 40 million KRW) or less, 15% of the paid premiums can be refunded through year-end tax settlement, and if it exceeds that, 12% can be refunded, up to a limit of 4 million KRW. However, for those with total salary exceeding 120 million KRW (comprehensive income 100 million KRW), the tax credit limit is applied as 3 million KRW.

Individual Retirement Pension (IRP) also qualifies for tax credits under the same income conditions. If you pay the full 4 million KRW pension savings insurance deduction limit and additionally pay 3 million KRW into an IRP, you can get a maximum deduction of 7 million KRW. Even if only IRP is paid, a maximum deduction of 7 million KRW is possible.

The government is expected to strengthen tax benefits as it recently proposed a tax law amendment to increase the tax credit amount for pension savings by 2 million KRW starting next year.

If the tax law amendment passes the National Assembly, a worker with a total salary of 50 million KRW who fully utilizes the pension savings insurance payment limit will see the tax credit amount increase from the previous 15% of 4 million KRW (600,000 KRW) to 15% of 6 million KRW (900,000 KRW) starting next year.

Tax-Exempt Benefits on Insurance Gains from Pension Insurance

Savings-type insurance also receives tax-exempt benefits on insurance gains. However, products that have already received tax benefits through year-end tax settlement, like pension savings insurance, are excluded. Tax-exempt benefits on insurance gains apply only at the final pension receipt stage for products without year-end tax settlement benefits, such as pension insurance.

Representative savings-type insurance products include pension insurance such as variable pension insurance, immediate pension insurance, and declared interest rate (interest-linked) pension insurance.

In the case of bank deposits and savings, interest income tax of 14% (15.4% including local tax) is imposed on the interest earned, but savings-type insurance can be exempt from this tax if certain conditions are met. Savings-type insurance is exempt from interest income tax in the following three cases.

First, single-premium savings-type insurance is exempt if maintained for more than 10 years and the premium amount is 100 million KRW or less. Second, monthly installment savings-type insurance is exempt if premiums are paid for more than 5 years, maintained for more than 10 years, and monthly premiums are 1.5 million KRW or less. Lastly, whole life pension insurance contracts are exempt if the pension is received only in pension form from age 55 until death.

However, since savings-type insurance is an insurance product, it is important to note that insurance companies deduct business expenses. Because business expenses are deducted from the insurance money, if you cancel in the middle, you may not get back the full principal, so long-term payment is essential.

Since pension insurance does not receive tax credits, even if canceled within 10 years, other income tax is not imposed. However, if the surrender value at cancellation exceeds the paid principal, it is considered that interest income has occurred, and interest income tax is imposed on the difference.

If pension savings insurance is canceled within 5 years of subscription, a 16.5% other income tax must be paid on the total premiums for which tax credits were received.

An insurance industry official emphasized, "Both products have advantages such as retirement preparation and tax savings, but it is necessary to remember that they are 'long-term financial products' and to carefully decide on subscription and cancellation."

Tax Credits Also Available for Protection Insurance

There are also tax credits for protection insurance, which we generally subscribe to. For wage earners, a tax credit benefit of 12% (13.2% including local tax) is available within an annual premium payment limit of 1 million KRW.

If you pay protection insurance premiums up to the 1 million KRW limit, you can receive a refund of up to 132,000 KRW.

Additionally, disability-specific protection insurance premiums qualify for a 15% (16.5% including local tax) tax credit. For example, if a disabled spouse is the insured and you pay 1 million KRW annually for general protection insurance and 1 million KRW annually for disability-specific protection insurance, you can receive a tax credit of 132,000 KRW (1 million KRW × 13.2%) for general protection insurance and 165,000 KRW (1 million KRW × 16.5%) for disability-specific insurance.