Taxation of capital received from a savings life insurance policy

The Directorate General of Taxes (DGT) has clarified the tax treatment applicable to the economic benefits received by beneficiaries of individual life insurance policies where the capital is paid out upon survival.

What the DGT has ruled

The ruling establishes that the receipt of capital upon survival in an individual life insurance policy is classified as income from movable capital. To determine the taxable base, the return must be calculated by subtracting the premiums paid from the total capital received.

There is an additional possibility for reduction: the portion of the premiums corresponding to the capital at risk for death or disability may be deducted, provided that such capital has been equal to or less than 5% of the mathematical provision throughout the term of the contract. Likewise, the insurance entity is obliged to apply a 19% withholding tax on the amount that is included in the taxable base.

What this means for you

If you are a beneficiary of a savings life insurance policy and receive a survival benefit, this amount is not considered a capital gain, but rather income from movable capital that must be included in the savings tax base of your Personal Income Tax (IRPF) return. The calculation of the real profit for tax purposes is not the total amount received, but the difference between what was collected and what was invested in premiums.

What you should do

It is necessary to verify the breakdown of the premiums paid and the proportion of capital at risk for death that was applied during the term of the insurance to ensure that the calculation of the return is correct. Since the insurer will apply an automatic 19% withholding, it is important to cross-check this figure with the annual settlement to avoid discrepancies in the savings tax base.