What you should know about investment insurance

TAK 21, TAK 23, TAK 26: undoubtedly you heard about it. But maybe you don't know the legal and tax inns and outs of the matter. We gladly guide you in a few steps through this complex labyrinth.

For a classic life insurance contract, the premiums are generally tax deductible and therefore the final allowances are taxed. With an investment insurance you can give up the tax deduction in order to receive the final allowance tax free. Investment insurances such as TAK 21, 23 and 26 can therefore be a good alternative for the more classic life insurance contracts.

Insurance bond

An insurance bond is an individual life insurance contract (TAK 21) in the name of someone. The system works as follows: the policy holder buys the 'bond' which insures the death of the assured party. Capital and interest will at the end be paid to the beneficiary. This payment can be made:

at the time of death of the assured party (death insurance); or

on the maturity date of the insurance bond if the assured party is still alive (life insurance).

In case of life insurance, the 'three' mentioned persons can be the same (the policy holder, assured party and beneficiary). In case the assured party/beneficiary dies before the maturity date of the bond, the successors will receive the allowances.

The insurance bond is, next to an insurance (TAK 21), also an investment instrument with a guaranteed return.

Tax treatment of the insurance bond

The allowances by death of the assured party are not taxable.

If the capital is paid when alive, it is taxed as interest (and consequently 21% withholding tax is due and the additional tax of 4% can be applicable). The following conditions should be fulfilled:

it is an individual life insurance contract;

the contract foresees in a guaranteed return;

you did not deduct the premiums paid (they cannot have lead to a tax reduction).

The paid allowance minus the total of the paid premiums gives the amount on which you will be taxed: the 'taxable amount'. The taxable amount cannot be lower than the amount corresponding to the capitalized interest at 4,75% per year on the total of the premiums paid; this is the 'taxable minimum'.

The law has foreseen in two separate exemptions so no tax is due on the received allowances in case:

the contract has a duration of more than eight years and the capital or allowances are also actually paid after more than eight years after signing the contract; or

the individual life insurance contract in case of death foresees in a coverage of at least 130% of the paid premiums and the tax payer has insured himself and (when alive) is the beneficiary of the contract.

A life insurance linked to an investment fund

A life insurance TAK 23 can be linked to an investment fund: your insurer engages himself at the time of your death or any other given time to remit a number of shares in the investment fund. This contract does not guarantee a certain return, but depends on the evolution of the fund. You should as policy holder/investor bear the risk completely yourself.

Tax treatment of TAK 23 linked to an investment fund

As policy holder you take a greater risk (compared to e.g. a TAK 21 contract), but you also receive a bigger tax benefit: the allowances when alive are tax exempt, to the extend that you did not benefit any tax reduction for the premiums.

The (new) additional taxation of 4% on unearned income is not applicable on these allowances. They also are not taken into consideration to determine whether the threshold of 20.020€ (tax year 2013) is exceeded. (This threshold is relevant to determine whether other unearned income can be subject to the additional taxation of 4%).

If a TAK 23 receives a guaranteed return, the tax regime of insurance bonds as described above applies. This means that the allowance is considered as interest, subject to the withholding tax of 21% and potentially also to the additional taxation of 4%. The same possibility for the tax exemptions applies.

Capitalization transactions

These contracts (also referred to as TAK 26) are in fact no insurance contracts. The essential elements (insured risk, assured party, beneficiary) to have an insurance contract are not present. Still these contracts can be obtained with an insurance company.

It concerns contracts where the consideration for unique or periodical payments is formed by engagements not depending on uncertain facts. The duration and the amount are stipulated in the contract. Such contracts offer a guaranteed return.

Tax treatment of capitalization transactions

Capitalization transactions are considered as fixed-return bonds. The income from these bonds qualifies as interest and is subject to 21% withholding tax. The additional tax of 4% is due if the threshold (20.020€ for tax year 2013) is exceeded. The amounts received are taken into consideration to determine whether the said threshold is exceeded.