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The benefits of Insurance are more than just Protection
While regulations on the debt and tax exemption feature of insurance policies vary from country to country, life insurance policies are exempt from taxation and debt collection in China as they are considered to be life-related assets. As a respect for life, the beneficiary’s right is greater than that of the creditor, who cannot demand the beneficiary to repay the debt with the received insurance proceeds. At present, Article 4(5) of the Individual Income Tax Law is the only regulation on insurance tax exemption in China that exempts insurance proceeds from individual income tax. Such proceeds are not limited to life insurance claims, but refer to all kinds of insurance claims. Article 5 of the Draft Provisional Regulations on Estate Duty (2010 version) clearly stipulates that “proceeds taken out from an insurance policy by the beneficiary” are “excluded from the total value of taxable estate”. Article 23(3) of the Insurance Law promulgated on 1 October 2009 states that “no entities or individuals shall illegally interfere with the performance of an insurer’s obligation to fulfill a claim or make an insurance payment, or to limit the insured or beneficiary’s right to receive the insurance proceeds.”
In other countries, if a successor inherits an estate, the taxes payable will be carefully calculated and the successor is required to settle the taxes in cash. In this case, he is likely to encounter the following problem: the estate administrator may sell the most profitable investments through auction just to settle the taxes. However, this problem can be avoided if an insurance policy has been set up in advance. The successor can now retain all the assets as well as receive his entitled tax free death benefit. Hence, insurance is a common instrument adopted by the affluent class worldwide.
Life insurance offers two advantages in the estate duty aspects:
- Reducing taxable assets: As stated in the Draft Provisional Regulations on Estate Duty, the premiums paid by the insured to his life insurance policy will no longer be counted as his personal asset but be vested to the insurance company, so the death benefit would not be included in the taxable estate.
- Life insurance offers high liquidity: as a normal practice, death proceeds are paid in cash which would not be frozen during the probate and therefore, can be used to pay for the estate duty if needed.
The deceased Taiwanese tycoon Tsai Wan-lin left a large fortune after his death. According to local law, his children had to pay an estate duty of NT$78.2 billion. However, familiar with insurance and trust businesses, Tsai legally passed down his wealth to his family through jumbo size life insurance policies, donations and special structure of holding companies. Eventually, the tax had been reduced dramatically and the final amount was less than NT$500 million.
According to the Hong Kong Estate Duty Ordinance before 2006, the beneficiaries of the deceased Hong Kong superstar Leslie Cheung should pay over HK$40 million estate duty as the singer had accumulated over HK$300 million estate over his lifetime. Fortunately, he had several life insurance policies in place with a total value of HK$40 million which offset the estate duty and avoid the auction of his legacies.
Today, many countries have already imposed a high estate duty regulation which seems to be unrelated to our own country but realistically, it is already affected our fast growing affluent class. At the National People's Congress 2012, the introduction of estate duty was proposed again, suggesting that such tax will soon be part of the PRC people’s lives. The high estate tax rates overseas have prompted many high net worth individuals to use insurance policies to reduce the tax payments and preserve their wealth for their next generations. Even if the successors’ personalized assets required to be used for settling debts or being confiscated due to debt disputes or lawsuits, the insurance benefits can still offer sufficient liquidity or even allow them to maintain a comfortable living standard. Though China has not yet implemented any regulations on estate duty, it is expected to take action within the next few years. As such, investing in a life insurance plan earlier does not only mean a lower cost, but also provides you and your family with better protection.
Don’t wait, action now!