Case 17
<Question>
Business is getting better, so I am thinking of acquiring life insurance. I am Canadian and my family in Canada advises me to use a Canadian life insurance company as they know the Canadian life insurance system. I have not decided whether I should make the contract in my own name or under the company name so please tell me the tax impact for both Corporate tax and Income tax.
<Answer>
When insurance is being acquired, a key consideration is whether it should be owned personally or through a corporation. Tax and other implications should always be reviewed as part of the decision making process.
Corporate tax
There are multiple situations in which a corporation may acquire an interest in a life insurance policy. While the corporation may “own” the policy, a separate decision still needs to be made with respect to the beneficiary designation. It is not uncommon to have a party other than the corporation (e.g., shareholder or employee) be the beneficiary under the policy. Common applications for corporate-owned insurance include the funding for buy-sell agreements, paying taxes at death, funding of post-employment benefits and for the provision of key-person protection. Needless to say, corporate ownership is considerably more complex than personal ownership.
(1) Endowment insurance
Endowment insurance is a type of funding insurance, and is payable to the insured if he/she is still living on the policy’s maturity date , or to a beneficiary otherwise.
| Insurance beneficiary | Insurance premium | ||
| Death payout | Pure endowment | ||
| Corporate |
Asset capitalization
|
||
| Employees’ bereaved family |
Employees |
Salaries to assured persons |
|
| Employees’ bereaved family |
Corporate |
1/2 =Inclusion in deductible expenses | 1/2 = asset capitalization |
(2) Term life insurance
Term life insurance is an insurance which offers no refund payment and provides coverage at a fixed rate of payments for a limited period of time.
| Insurance beneficiary of death payout (No pure endowment exisits) |
Insurance premium |
| Corporate | Inclusion in deductible expenses |
| zEmpolyees’ bereaved family | Inclusion in deductible expenses *1 |
*1 If the insurance is not contracted for all employees, the insurance premium is treated as salaries to the employees.
(3) Endowment insurance with term life insurance
- Insurance premium for endowment insurance
Base upon endowment insurance rule. - Insurance premium for term life insurance
Base upon term life insurance rule. - Unclear about classification of each insurance
Base upon endowment insurance rule.
Income tax
Insurance premiums are not included in deductible expenses for income tax purposes. Instead, up to JPY 40,000 isdeductible from income. Insurance premiums are categorized as life insurance, individual pension plans, and nursing care. The nursing care premium will be set up from 2012, January 1, and the deductible amount of each insurance premium is JPY 40,000 or less, the total deductible amount is up to JPY 120,000. (before 2012, January 1, the classifications for insurance premiums were only life insurance and individual pension plans. Each deductible amount was up to JPY 50,000, and the total amount was up to JPY 100,000)
(1) New insurance contract after 2012, January 1
| Insurance premium | Deductible amount |
| Lessa than JPY 20,000 | Paid insurance premium is deductible |
| JPY 20,001 – JPY 40,000 | Paid insurance premium × 1/2 + JPY 10,000 |
| JPY 40,001 – JPY 80,000 | Paid insurance premium × 1/4 + JPY 20,000 |
| Over JPY 80,000 | JPY 40,000 |
(2) Old insurance contract before 2012, January 1
| Insurance premium | Deductible amount |
| Less than JPU 25,000 | Paid insurance premium is deductible |
| JPY 25,001 – JPY 50,000 | Paid insurance premium × 1/2 + JPY 12,500 |
| JPY 50,001 – JPY 100,000 | Paid insurance premium × 1/4 + JPY 25,000 |
| Over JPY 100,000 | JPY 50,000 |
Foreign insurance company
Insurance premiums contracted in foreign countries are not deductible. Insurance companies in Japan have to be licensed by a Financial Services Agency, and the insurance premiums by the licensed companies are deductible. Therefore, if the insurance is acquired by foreign invested insurance companies in Japan which are licensed, the insurance premiums are deductible.
By Certified Public Accountant (CPA) & Tax Accountant, Koji Takahashi,
Tokyo & Yokohama
