The Living Needs Rider, which is beneficial upon a terminal diagnosis, has a major advantage: the “benefit received while alive is tax-exempt.” However, utilizing this rider requires careful consideration, as it affects the calculation of future inheritance tax and the division of assets. In particular, a crucial point of caution is that if the insured passes away leaving unused funds from the benefit, the tax-exempt allowance normally applied to the death benefit cannot be utilized, potentially increasing the burden of inheritance tax. This article details the rider’s tax mechanism and the specific impact on inheritance that families should be aware of.
1. When the Living Benefit Payment is Received (Tax-Exempt)
| Tax Status | Treatment | Details |
| Living Benefit Payment | Tax-Exempt | The received benefit (an advance payment of the insurance money) is not subject to income tax or gift tax. |
This is because the benefit is deemed to be “paid due to physical injury” and is treated as tax-exempt income. Therefore, at the time the Living Benefit Payment is received, there is generally no need to worry about taxes.
2. When the Insured Dies After Receiving and Not Using the Entire Living Benefit (Inheritance Tax)
| Tax Status | Treatment | Details |
| Unused Amount | Subject to Inheritance Tax | The amount remaining after being received as a benefit is considered the “Insured’s Individual Property.” |
This unused portion is left as cash or deposits upon death and is therefore treated as ordinary inheritance property and subject to inheritance tax.
【Critical Caution】
- The death benefit is typically eligible for a tax-exempt allowance of “5 million × the number of statutory heirs.”
- However, the amount remaining after being received as a Living Benefit Payment is not recognized as a “deemed inheritance property (death benefit).”
- Consequently, this tax-exempt allowance does not apply, and the entire unused amount is subject to inheritance tax calculation.
Summary of Inheritance Impact
When the Living Needs Rider is utilized, the “Death Benefit” is converted into a “Living Benefit Payment,” and its subsequent usage and remaining balance affect inheritance.
| Item | Without Rider Utilization | With Rider Utilization (and Unused Funds Remaining) |
| Total Death Benefit | The amount as per the contract. | Reduced by the amount received as a Living Benefit Payment. |
| Change in Inherited Assets | Paid to the beneficiary as a death benefit (tax-exempt allowance applies). | The unused portion is added to the insured’s cash/deposits (NO tax-exempt allowance). |
| Subject to Asset Division | The death benefit is generally the beneficiary’s inherent property (*). | The unused portion becomes subject to asset division. |
* (Beneficiary’s Inherent Property): Exceptionally, the death benefit may be subject to asset division as a special benefit, but the principle is that it belongs to the beneficiary.
Conclusion: Tax Benefits and Drawbacks
| Benefits | Drawbacks |
| Tax-exempt when received during life and can be freely used for treatment and living expenses. | The tax-exempt allowance for inheritance tax does not apply to the unused portion, reducing the tax-saving effect. |
| A portion of the death benefit can be flexibly used for living expenses while alive. | The death benefit itself is reduced, lessening the amount the bereaved family receives. |
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Therefore, when utilizing the Living Needs Rider, it is crucial to only claim the necessary amount and to have a thorough discussion with the family regarding the potential increase in the inheritance tax burden due to unused funds and the reduction in the death benefit received by the bereaved family.
