Tax Education: Understanding the Tax-deductibility of Life Assurance Premium

One of the products of many Insurance companies in Nigeria is a life insurance policies. While one life policy may have a clause of maturity and payment to the policy holder in his life time (i.e. when the holder is still alive), another will require the insurer to pay a beneficiary a certain sum of money in exchange for a premium, when the policy holder dies.

For the purpose of computing Personal Income Tax (PIT), Section 33 (4b) of the Personal Income Tax Act Cap P8 LFN 2004 (as amended) provides for the tax deductibility of any premium paid by an individual during the year preceding the current year to an insurance company in respect of his/her life and the spouse. The section further provides for the deductibility of deferred annuity of an individual and that of their spouse.

The view that any policy that has an element of life policy (even if it will mature after some years) qualifies for tax deduction may be wrong. This divergent of views made the Lagos State Internal Revenue Service (LIRS) in 2017, to issue a public notice giving clarification on the treatment of savings element on insurance premium. The Tax Authority defines Life Insurance as:

A contract where the insurer promises to pay a beneficiary a designated sum of money in exchange for a premium, upon the death of an insured person. An annuity life contract provides for the annuitant to be paid a fixed monthly amount until death or benefits are exhausted.

 LIRS further provided the following compliance requirements:

  1. Only the insurance premium relating to the life insurance or deferred annuity on life are deductible in computing PIT.
  2. Any savings scheme element which sometimes forms part of the life insurance premium or contract should not be included in the deduction.
  3. For any life insurance policy to qualify for tax relief, it must include the following:
  • A cover for the death of the insured or their spouse: or –
  • It must not include or anticipate a payment to the insured before the age of 50 i.e. for deferred annuity contracts.
  • Deferred annuity contracts in line with the provisions of the Pension Reform Act (PRA), 2014 are tax exempt where the holder has no control over the funds (i.e. it must be completely locked in until retirement age).
  • Reporting Obligation: Every employer/taxpayer is required to submit the Claims for Allowances and Relief (FORM A) for each relevant tax year detailing the life insurance and qualifying deferred annuity contributions. Also, the taxpayers will be required to submit a certificate from their Life Assurance companies specifying the portion of the premium relating to death policy and the portion relating to the savings element.

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