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Life insurance proceeds

/ 06:47 AM September 30, 2011

THE proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise is excluded from gross income and not subject to Philippine Income Tax. If the amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. Section 32 (B) of the National Internal Revenue Code in part provides:

“(B) Exclusions from Gross Income. — The following items shall not be included in gross income and shall be exempt from taxation under this title:

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Life Insurance. — The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.”

As to the Philippine Estate Tax, Section 85(E) of the National Internal Revenue Code states that the proceeds from the life insurance shall be included in the computation of the Gross Estate of the deceased when the beneficiary is the estate, executor or administrator, whether or not the designation is revocable or irrevocable, and when the beneficiary is other than the estate, executor or administrator, and the designation is revocable. On the other hand, the proceeds from the life insurance shall not be included in the computation of the Gross Estate when the beneficiary is other than the estate, executor or administrator, and the designation is irrevocable.

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It is important to note that the Philippine Insurance Code presumes that the designation of a policy is revocable in case the designation of the beneficiary is not clear or silent. Section 11 of the Insurance Code states that “the insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy.”

The funds transferred to a resident of the Philippines upon the surrender of the policy or even upon its partial surrender shall generally not be subject to Philippine Income Tax. Such transfers are considered as returns of the premiums paid by the insured, of which shall be excluded in the computation of the taxpayer’s gross income. Section 32 (B)(2) of the National Internal Revenue Code states the following:

“Sec. 32. (B) Exclusions from Gross Income. – The following items shall not be included in gross income and shall be exempt from taxation under this Title:

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(2) Amount Received by Insured as Return of Premium. – The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.”

However, the beneficiary who is a Philippine resident shall be subject to the Philippine Income Tax to the extent that the funds representing the cash surrender value exceeds the amount of funds transferred to the trustee or offshore company.

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