Are Critical Illness Payments Taxable?

Paying for a protection plan is a transaction that is mostly only between you and your insurance company. When you talk about taxes, however, you may need to consider other key players like your employer and the tax laws in your country.

by Sheen Moringa, 26 November 2017

Will taxes be an additional burden to critical illness expenses?

The answer is yes and no. 

Critical illness policies (https://www.fwd.com.ph/en/protect/health/set-for-health/) are protection plans crafted by insurance companies, like FWD (https://www.fwd.com.ph/en/news-press/press/2017/fwd-launches-set-for-health/), to cover debilitating diseases that can significantly change one’s life like cervical cancer, kidney failure, and bacterial meningitis. 

Because of the several factors that can affect the taxation of your critical illness plan, it is important for you to review the policies of your insurance company first (https://www.fwd.com.ph/~/media/Files/FWDPH/pdf/protect/health/FWD-SET-FOR-HEALTH-WEB-2017-v2.pdf), before securing the deal.

When is Critical Illness Insurance Nontaxable?

Insurance companies will tell you that an individually owned stand-alone critical illness protection plan is definitely not taxable. 

This is the major difference between their critical illness plans and disability insurance policies (https://www.fwd.com.ph/en/corporate-care/for-companies-and-organizations/group-accident/). In the latter, your investments become your income, somehow. Depending on the case, the disability may become a hindrance to your good performance at work. Because of this, disability insurance (https://www.fwd.com.ph/en/corporate-care/for-companies-and-organizations/group-life/), depending on the policies of your employer, may be translated into income, which is taxable in the Philippines by the Bureau of Internal Revenue (BIR). 

On the other hand, critical illness policies are more like life insurance plans. It becomes your protection in the long run, rather than for income or profit, specifically after the diagnosis. Hence, the money you get from your critical illness insurance is not taxable.

When is Critical Illness Insurance Taxable?

If you have a stand-alone critical illness plan, you certainly would not pay tax for it. However, the tax payment now arises depending on who the owner of the critical illness insurance is. Here are some of the scenarios when critical illness insurance may be considered taxable, as advised by insurance companies:

• The protection plan is corporate-owned

A purchased critical illness plan can be considered a capital or a revenue expense of a company. If your company lists the illness benefit as a capital, then it is subjected to tax, as mandated by the Philippines Tax Code. 

• The insurance benefit is handed to the employee as income

There are cases wherein your critical illness insurance plan is covered by your employer. When this happens, the insurance may now be considered as corporate-owned. Moreover, depending on the policies of the employer, the benefits may be deemed as income, to be received by the employee. When this happens, it is now subject to the Withholding Tax collected by BIR.

• The plan is individually owned yet combined with a life insurance, making it part of the person’s estate

Yes, a critical illness plan can be integrated into your life insurance. This actually provides cheaper premiums and an extended list of benefits. However, this also means that your critical illness insurance benefits will now be part of your estate, which is subject to the Estate Tax of BIR. In addition, upon your death and upon the transfer of the assets to your heirs, Inheritance Tax may also play a role.

Insurance and taxes are two of the things which can only be best understood when explained by an expert in the field. There may be reading materials available, but nothing beats the guidance of a licensed professional.  Call your insurance agent now (https://www.fwd.com.ph/en/contact-us/) to know more about critical illness plans and taxes.