How is the beneficiary under a life insurance contract taxed?

When another person is forced to become the beneficiary under a life insurance contract, is the amount of compensation taxable?

In most cases, the beneficiary under a life insurance contract is the close relatives of the deceased. If the payment will take place in accordance with the law “On Inheritance”, then it will take at least six months. But a life insurance policy is necessary precisely at the moment of death, when expenses arise when organizing ritual events. 

In the existing tax field, the payment for the risk of “death for any reason” under a life insurance contract is not included in the inheritance. Taxation occurs at three rates – 0.5%, 5% and 15%, depending on the degree of kinship. And the payment of insurance compensation, regardless of the degree of relationship of the beneficiary, is subject to a rate of 15%. That is, we can state that in Ukraine there is a tax on death.

There are two possible options.

The first is the abolition of taxation of death benefits.

But the most effective may be the option that is used in European countries. There, the amount of payment up to a certain amount is not subject to taxation. An amount above this amount is subject to tax determined by the state. At the same time, in Europe, as a rule, the life of the breadwinner is insured and the payment of insurance compensation for the risk of “death for any reason” is interpreted as a replacement for income in the event of loss of the breadwinner.