Many mortgages taken out to finance a home also include a capital insurance policy. The intention is that the capital accumulated through this ‘home ownership capital insurance’ (KEW) policy will be used to repay the mortgage.
Endowment insurance
With an endowment policy, you generally pay premiums monthly, quarterly or annually. The insurance company invests these premiums or pays interest on them. When the policy reaches the end of its term (upon expiry), the accumulated capital is paid out to you.
Savings account
An alternative to the home ownership endowment insurance (KEW) is the home ownership savings account (SEW). In this case, you do not pay any premiums, but instead make regular deposits into a savings account with a bank each month, quarter or year. At the end of the SEW term, the balance in the savings account is paid out to you.
Income
The income from a KEW or SEW is calculated as the difference between the premiums or contributions paid and the capital paid out.
Example
You pay a monthly premium of €100 for 20 years. The total premium paid will then amount to: 240 * €100 = €24,000.
Upon expiry, the insurance company will pay out the accumulated capital, amounting to €30,000, to you.
Your income from the endowment policy will then be: €30,000 – €24,000 = €6,000.
It should be noted that, in this example, the full premium of €100 is not actually invested. For example, the insurance company’s fees, as well as the premiums for additional insurance policies, are paid out of the premium in advance.
Exemptions
Income from a KEW or SEW is not subject to income tax if:
- the benefit does not exceed € 36.800 and for at least 15 years has paid or contributed a premium;
- the benefit does not exceed € 162.000 and for at least 20 years has paid or contributed a premium.
Other conditions for the application of the exemption are:
- the highest annual premium may not exceed 10 times the lowest annual premium;
- The exemption applies insofar as the payment is actually used to make repayments on the mortgage on the owner’s own home.
Example
In the previous example, the homeowner pays a premium of €10,000 in the first year. In subsequent years, they pay €100 per month.
The highest annual premium is therefore €10,000. The lowest is 12 × €100 = €1,200.
10 times the lowest annual premium comes to: 10 × €1,200 = €12,000.
Conclusion: the highest annual premium was less than 10 times the lowest annual premium. The exemption applies.
Lump-sum settlement
Homeowners facing financial difficulties may sometimes need to withdraw the capital from their KEW or the balance on their SEW before the end of the term. If premiums have not been paid or contributions made for 15 or 20 years, the payout is not exempt from income tax. Naturally, tax is only payable if the KEW or SEW has, on balance, generated a positive return.
Time limits do not apply
The required periods of contribution payments described above are the time constraints as mentioned. In the cases set out below, these time limits do not apply. This means that the benefit paid under the KEW or SEW is exempt, even though contributions have not been paid or accrued for at least 15 or 20 years.
These situations are:
- termination of a tax partnership (for example, in the event of divorce);
- if debt counselling is offered;
- the sale of one’s own home, where a new home is immediately available (KEW or SEW to be paid within 6 months of the sale of the home);
- if the costs associated with the owner-occupied home can no longer be met (as assessed by a designated department of the Tax and Customs Administration in The Hague).