Paid contributions to private life insurance is one of the ways how to reduce a tax base. But is that really convenient?
Life insurance falls into two categories: insurance of risks and investment insurance. Given to the fact that government tends to support people’s savings for the retirement, they allow to lower a tax base only by contributions paid to an investment insurance. The truth is that investment life insurance is not the best choice. Among other investment products life insurance has higher fees, hence lower appreciation. In recent years more and more people realize that, because we have experience with situation when an employee terminated their life insurance and because they lowered their tax base in previous years, they are obligated to file a tax return and tax the contributions applied in the past 10 years. A similar situation occurs when an employer was contributing to an employee’s private life insurance.
That wouldn’t be so horrible, but given the fact how the Czech income tax law works and how high the fees of life insurance are, the final situation may be quite bizarre. The fees are sometimes so high that even after few years of contributing, no investment part is created. All the payments were consumed by commissions and fees. Furthermore, an employee could have applied tax base deductions with no real effect to the final tax (the tax could have already been fully reduced by other tax reliefs or tax base deductions). But that doesn’t change the fact that the full applied deduction amounts have to be now taxed.
When an employee terminates they life insurance, paid for 4 years, not only do they get nothing back from the insurance company, but they can’t ask their employer for annual tax reconciliation (ATR), because they are obligated to file a tax return on their own and through this tax return they have to pay 15% tax of paid contributions even though they didn’t receive any financial benefits in previous years.
Because of that we try to encourage employees, whose life insurance wouldn’t help them in ATR, to cancel their application for the tax deduction.