“For my family’s sake, I should choose a type of insurance that pays out monthly like a salary (such as income protection insurance).”
Many people likely join insurance plans with this mindset.
However, the actual “payment method” alone could potentially change the “take-home amount” your family receives in the future by millions of yen.
Behind the sales pitch that “annuity payments are more advantageous because the total payout is higher” lie hidden pitfalls concerning taxes and social insurance premiums that you should be aware of.
In this article, based on real-world case studies from a Financial Planner (FP), we will explain key points to avoid mistakes in your life insurance “exit strategy.”
- 1. The Misconception That “Death Benefits = Only Inheritance Tax”
- 2. More Frightening Than Taxes? The Chain Reaction of “Social Insurance Premiums”
- 3. [Case Study] The Reality Facing the Family of 38-Year-Old Company Employee A
- 4. FP’s Guide to “Choosing Insurance Without Regrets”
- Summary: Is Your Insurance Designed for the “Exit”?
1. The Misconception That “Death Benefits = Only Inheritance Tax”
While the common understanding that “death benefits are subject to inheritance tax” is widespread, the tax structure becomes significantly more complex when benefits are received in annuity form (installments).
Double Taxation? The Combination of Inheritance Tax and Income Tax
When insurance benefits are received as an annuity, taxation changes as follows:
- Year 1
Inheritance tax is levied on the assessed value as death insurance proceeds (subject to tax exemption limits). - Year 2 and Beyond
The portion equivalent to investment gains is treated as miscellaneous income and subject to annual income tax and resident tax.
In other words, the structure involves paying inheritance tax on the original assets, then paying income tax on any subsequent growth.
Calculating this “taxable portion” is extremely complex and can unknowingly erode your “take-home pay.”
2. More Frightening Than Taxes? The Chain Reaction of “Social Insurance Premiums”
The biggest blind spot of receiving payments in a pension format may actually be the “impact on social insurance premiums” rather than the taxes themselves.
Because the received pension is counted as “miscellaneous income,” it increases the recipient’s (survivor’s) total income amount.
As a result, there is a risk of triggering the following chain reaction:
- Increase in National Health Insurance Premiums
Calculated based on the previous year’s income, leading to a significant increase in the burden. - Exclusion from Dependent Deductions
When survivors find new employment or attempt to become dependents of relatives, they may exceed the income limit. - Increased Out-of-Pocket Costs
The percentage of medical expenses and long-term care services paid out-of-pocket may rise.
The reversal where “the face value received is higher with annuity payments, but calculating the ‘net take-home pay’ after taxes and insurance premiums shows lump-sum payments are more advantageous” is by no means uncommon.
3. [Case Study] The Reality Facing the Family of 38-Year-Old Company Employee A
Let’s simulate what happens if 38-year-old A passes away and his wife B receives the “income protection insurance” as annuity payments.
Even if it initially falls within the tax-exempt limit, from the second year onward, it generates hundreds of thousands of yen annually in “miscellaneous income.”
Mrs. B would need to file annual tax returns, and upon seeing the following year’s resident tax and health insurance premium notices, she would be shocked.
“I was supposed to get ¥200,000 a month, but what actually stays in my hands is much less than expected…”
To prevent such situations, it is essential to base calculations on the “take-home pay” when enrolling.
4. FP’s Guide to “Choosing Insurance Without Regrets”
When considering insurance, people often focus solely on “monthly premiums” or “coverage amount (entry point).”
However, to truly protect your family, it’s crucial to choose an advisor who can discuss the following “exit strategy.”
- Net Take-Home Pay Simulation
Compare amounts after deducting taxes and social insurance premiums. - Informed Consent
Understand not only the benefits but also the drawbacks, such as the hassle of filing tax returns. - Collaboration with Professionals
When complex tax decisions are required, is there flexibility to incorporate perspectives from professionals like tax accountants?
Summary: Is Your Insurance Designed for the “Exit”?
The “annuity form” offers the major advantage of receiving living expenses in a planned manner.
However, ignoring the impact on tax and social security systems can diminish your hard-earned savings.
Life insurance isn’t something you just “sign up for and forget about.”
“If I were to receive the insurance payout right now, what would my final take-home amount be?”
If you can’t confidently answer this question, why not seek a second opinion from a specialist about your “exit strategy”?
