Wealthy Put Money in Insurance, And Heirs Get It Back Tax-Free

To avoid paying inheritance tax, an increasing number of wealthy people are signing up for life insurance policies with high death benefits － as much as 3 billion won ($2.3 million).

Unlike cash, financial assets and real estate, which are heavily taxed, insurance settlements are generally not taxed because they are regarded as money contracted for, not investment proceeds. But the effect is to transfer wealth to beneficiaries, with no taxes paid in the process.

In February, the founder of a dot-com start-up, still in his 30s, signed up for this insurance package. "He has an enormous amount of wealth, hovering around a trillion won," said an insurance company employee who handled the transaction. "He joined our insurance to avoid paying inheritance tax."

He added that the high-value insurance policies, introduced in August, had enrolled more than 10 people so far. The company's revenues from the policies were more than 7 billion won in May alone － double the April figure.

Other companies have attracted similar numbers for comparable insurance products that pay as much as 2 billion won.

A foreign insurance company was the first to introduce this type of insurance to Korea in 1994. Its revenues shot up from 3 billion won then to 240 billion won this year.

The popularity of the package surged after a 40-year-old pediatrician died within 19 hours of enrolling for one. He had paid only the initial premium of 2.3 million won but his widow and children collected 1 billion won.

Some insurance companies are said to recruit by actively advising their wealthy clients on how to avoid taxation.

"Minors may be levied taxes later because they don't pay the premiums themselves," said an insurance agent. "We advise their parents to report to the National Tax Service that their children received wealth transfers equal to the monthly premium to avoid paying taxes."

A tax service official said it was difficult to tax the transactions since it is difficult to ascertain who actually paid the premiums.

by Jung Hyo-sik