Life Insurance: From Risk Coverage to Tax Benefits

Life insurance is basically purchased to prepare for risks that may occur anytime and anywhere. However, besides risk coverage, there are various tax benefits available when subscribing to life insurance.

Generally, when you subscribe to a fixed deposit or installment savings at a bank and reach maturity, you receive interest on the principal. At this time, you pay 14% (15.4% including local tax) interest income tax. Life insurance also includes "savings-type insurance" products such as pension savings insurance or savings insurance that have a savings function. By subscribing to these products, you can enjoy tax exemption benefits.

Under tax law, the amount obtained by subtracting the paid premiums from the maturity insurance money or refund due to early cancellation is classified as interest income. For single-premium savings-type insurance, if maintained for more than 10 years and the premium amount is less than 100 million KRW, the interest income is tax-exempt. For monthly installment savings-type insurance, if premiums have been paid for more than 5 years or maintained for more than 10 years and the monthly premium is less than 1.5 million KRW, the interest income is tax-exempt. For whole life pension insurance contracts, if the insurance money is received only in the form of a pension from age 55 until death, interest income tax exemption applies.

The National Pension, Retirement Pension, and Personal Pension are commonly referred to as the "three-layer protection" for retirement life. Among these, the pension savings insurance, a personal pension life insurance, is a representative tax-saving product. You can receive a tax credit for the pension savings insurance premiums paid over the past year. If your annual earned income is 55 million KRW (or comprehensive income of 45 million KRW) or less, you can get a refund of 15% of the paid premiums up to a limit of 6 million KRW through year-end tax settlement. If your annual earned income exceeds 55 million KRW, 12% applies.

The Individual Retirement Pension (IRP) also qualifies for a tax credit under the same income conditions. If you pay 6 million KRW for pension savings insurance and an additional 3 million KRW for IRP, you can get a maximum deduction of 9 million KRW. Even if you pay only IRP, a maximum deduction of 9 million KRW is possible.