Circular No. 21 of 2022
Life insurance with savings includes, together with coverage for the risk of death, disability or others, the accumulation of savings in a single investment account (“CUI”), whose funds can be fully or partially withdrawn by the insured beforehand upon death, or they can be added to the compensation received by the beneficiaries upon death. The profitability of the CUI can be completely variable or have a minimum guaranteed by the insurer. Likewise, the insured may have different degrees of control over the investments made.
Law 21,420 of 2022 modified the Tax on Inheritance, Assignments and Donations (“IHD”)* in the sense of taxing the benefits paid for life insurance on the occasion of the death of the insured. As of this legal change, the Chilean Internal Revenue Service (SII) updated, through Circular No. 21 of 2022 (the “Circular”), the tax treatment of life insurance with savings.
According to the Circular, the tax treatment differs depending on the type of redemption and its opportunity.
On one hand, the payment of compensation for death of the insured life, including that part of the compensation that is paid from the capital and profitability in the CUI, is taxed only with IHD. That is, it is not affected by income tax.
On the other hand, redemptions of savings accumulated in the CUI before the death of the insured life, whether total or partial, verified as of April 27, 2022, are not affected by IHD, but are affected by income tax. when they exceed the capital previously contributed. Specifically, the amount that is levied with income tax is the excess over the sum of the premium or capital previously contributed to the CUI and the charges or deductions made by the insurance company.
The Circular also recognizes an income tax exemption (strictly speaking, non-rental income) of up to 17 UTM** per year, applicable only to total (i) redemptions, either during the term of the insurance or as a consequence of the term of the contract, (ii) that have not taken advantage of the repealed article 57 bis of the LIR*** and (iii) of insurance contracts with a term of more than 5 years****. This deductible is for the set of insurance contracts, establishing a reassessment of the tax in the event that the insured maintains life insurance with savings in more than one insurance company. The recognition of this exemption constitutes a change to the criteria maintained by the SII in Official Letter No. 1535 of 2017, which did not recognize it in any case for the “savings” component of insurance.
Insurance companies are required to withhold 15% of the sums redeemed or paid, which is charged to the payment of the beneficiary’s tax.
*These modifications and the changes that they produce in tax matters are dealt with in Circular No. 20.
**According to the value of the UTM in force as of December 31 of the year in which the income is received.
***This article established a tax benefit whose objective was to encourage savings and consisted of a credit or reduction equivalent to 15% of the “positive net savings” of each year, to the Complementary Global Tax or to the Single Second Category Tax. It was a benefit for individual taxpayers who had certain instruments or securities, among which were the savings accounts associated with life insurance, meeting the other requirements established by the legal standard.
****It is understood that insurance policies that, not having a fixed expiration date, have a total withdrawal in a period of more than 5 years, counted in the same way, can benefit from this article. Likewise, those insurances that are valid for less than 5 years, but with automatic renewal of the term, by virtue of which more than 5 years pass, are included.