What is an Insurance Premium Tax?

Governments will levy an insurance premium tax on businesses that receive premium payments from clients. Clients will purchase insurance policies to cover the potential loss of property or to help mitigate health problems, among other policies. Businesses receiving these payments will often record them as income, meaning that governments can tax the payments however they wish. Not all countries will levy an insurance premium tax; those that do may keep the tax rate low, such as 5 to 10 percent, although the rate can vary greatly.

Insurance companies often sell a wide range of policies. Premiums vary, depending on the creditworthiness of clients, terms of the insurance policy and length of the policy. In many countries, insurance companies face strict regulations regarding their operations. An insurance premium tax is just one form of regulation. In many ways, taxes on any business activity can have the unintended consequence of lowering the amount of activity taxed. This can limit the number of insurance policies sold for certain items, such as health, renters or business forms of insurance.

Most companies selling insurance policies will have to file with the local or federal government. This filing is generally necessary, depending on the government agency that will assess the taxes. While not all insurance premiums may be taxable, the company will need to disclose the policies it sells. The type of insurance policies can also affect a company’s tax rates. For example, long-term insurance policies may be exempt from taxation. However, government agencies may levy an insurance premium tax on short-term policies. Tax rates may also differ, based on policies issued, such as 5 percent for life insurance policy premiums and 9 percent for premiums relating to homeowner’s insurance policies.

Insurance firms will likely have to add new procedures for collecting and reporting insurance premium tax. Many government agencies allow for filing the tax annually early on. As the company grows or insurance premiums increase, however, the company may need to file more frequently, such as monthly, quarterly or semi-annually. Filling out a form and documenting the premiums received is often a necessary part of filing an insurance premium tax. This reporting will also increase the amount of paperwork and document retention for the company. Like other taxes — such as payroll, property, income and others — document retention is typically several years. This ensures the company will have any documentation needed if it undergoes an audit by the government that focuses on an insurance premium tax.