Press Release
February 7, 2010


Senator Edgardo J. Angara seeks to provide tax relief to the country's life insurance industry and filed bill remove documentary stamp tax and tax on the premiums for life insurance.

"The underlying principle behind this proposed legislation is that life insurance is practically a savings vehicle for an individual and the imposition of a tax on this type of insurance serves to increase the cost of savings, thereby diminishing its attractiveness as an economic method for long-term saving accumulation," said Angara who chairs the Senate Committee on Finance.

He added, "Any tax policy should preferably be neutral. This means that a tax policy should not cause anyone industry or product to have undue economic gain over the other. The present tax treatment of life insurance makes the banking system a more attractive option for placement of savings. Likewise, heavy taxes serve as a disincentive to buy life insurance products."

Comparatively speaking, the Philippines is the only country in the Southeast Asia which charges a five-percent (5%) tax on the yearly premium for life insurance policies. This is over and above the additional taxes imposed on the earnings of the policyholder's long-term savings with the insurance company, such as a 20% tax on interest income.

According to Angara, the premium paid on a life insurance policy consists of two major components: (1) the insurance component or the amount necessary to cover the cost of pure insurance protection; (2) the investment component or the amount that is added to the policy reserve which the insurer invests.

The latter represents the accumulated savings in the form of cash values to be returned to the policyholder upon maturity of the policy or at the time it is surrendered for cash. Hence, the higher the number of the policy holders or the amount of insurance coverage, the higher the amount of savings that can be accumulated by the insurance industry. Higher savings mean more investments that translate to higher economic growth.

From the equity point of view, the savings portion of the insurance policy is inevitably taxed since the premium tax is applied on gross premiums. This places savings in the form of insurance policies at a disadvantage compared to other forms of savings particularly those generated by the banking industry. It is to be pointed out that in case of bank deposits, only the interest income on the amount deposited is taxed.

"Thus, by removing the premium tax on the life insurance policies and annuities, this measure will strengthen the life insurance industry, promote its ability to generate long-term funds for the economy and as a consequence, it would also address the unequal tax treatment of the various forms of savings," added Angara.

On the other hand, the current method of imposition of the documentary stamp tax on life insurance requires a fixed percentage of premium every time premiums are paid which effectively is an add-on premium tax.

Angara added that it may well be that the practice of other jurisdictions and several ASEAN countries like Singapore, Indonesia and Malaysia be adopted where a one-time fixed but nominal tax is imposed regardless of the value of the insurance policy.

Further, he urged for an earnest passage of SB 3181 along with other financial reforms legislation to further gear the country to a more stabilized and progressive economy.

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