The millions of premature terminations of life insurance contracts generally mean a loss-making business for the investor. This also raises the question of how these can be claimed for tax purposes.
Double disadvantage
Profits from life insurance policies are regularly subject to tax. However, losses incurred in cases of premature contract termination where the amount repaid is lower than the premiums paid in are not to be recognised for tax purposes at all for contracts concluded up to 2004 and only to a limited extent for contracts concluded later. In these cases, however, the failure to take losses into account can at most be systematically justified if the insurance premiums previously paid could, for example, be claimed as special expenses to reduce tax.
However, this is regularly not possible, since given maximum amounts for special expenses have usually already been exhausted elsewhere. In the case of life insurance policies, an additional aggravating feature is that, for tax purposes, the payout of the life insurance policy is divided into capital paid out and an interest portion. The taxable interest portion is determined by the insurance company on the basis of the results of its investments. The resulting amount is thus regularly positive and triggers tax consequences for the insured person who has interest income.
The contributions paid in by the insured person are not taken into account in this calculation of interest. These are fully offset against the repaid capital share, which in the case of premature repayment regularly results in the aforementioned tax-irrelevant loss. The curious result can now be that interest income is taxable, although the sum of “interest” and repaid capital is lower than the total insurance premiums paid by the insured person, so that in the overall view an economic loss has actually occurred. This is because the insurer first deducts its acquisition and administration costs from the premiums paid in: The premiums paid in by the customer, mostly from money that has already been taxed, are therefore reduced by these costs in economic terms. If there is a repayment later, only this partial amount, i.e. a fraction of the payments, is tax-free.
Legal situation only clear since 2005
For contracts concluded since 2005, the legislator now provides for the basic possibility of also taking into account losses incurred for tax purposes. However, the recognition of losses is conditional on the existence of an intention to make a profit. For old contracts prior to 2005, on the other hand, the only option is to seek clarification in court and refer the matter to the Federal Constitutional Court. Tax advisors must point this out, with reference to a new test case before the Dessau Tax Court (Ref. 2 K 1169/08). In the event that the Constitutional Court comes to the expected conclusion that the tax consideration of the losses is to be recognised, relevant income tax assessments should be kept open on this point as far as possible.
by Dr. Johannes Fiala and Dr. Uwe Dörnbrack
by courtesy of
www.hausarzt-online.de (published in Der Hausarzt, 05.07.2009)
