In the past, endowment insurance policies were often taken out with the intention to use the amount paid out at maturity to repay the mortgage. This occurred mostly in combination with an interest-only mortgage. However, the government wants to move away from interest-only mortgages and that is why it has decided to also tackle the issue of endowment insurances. As of January 1, 2013, mortgage-linked endowment insurance (kapitaalverzekering eigen woning; KEW) can only be taken out in exceptional situations.
How do you remain outside the scope of box 3?
The KEW clause will determine whether you fall under box 1 or box 3. One of the conditions for falling, or continuing to remain, outside box 3 is that the endowment insurance must be linked to the principal residence, i.e. the policy agreement must clearly state that the lump sum payment on maturity is to be used to repay the mortgage. A qualifying KEW is exempt in box 1.
Do you need to take action, and, if so, when?
Is it worthwhile to quickly convert an existing policy that falls under box 3 to a KEW that falls under box 1? You do not have to decide immediately, at least not before January 1, 2013; you have been given an extra couple of months respite, until April 1, 2013. Whether or not it is worthwhile depends on the date the endowment insurance was taken out and the tax regime under which it falls.
Different tax regimes
Firstly: if your policy contains a KEW clause, then you do not have to take any action. However, it is not advisable to increase the insured amount or extend the term of the policy, as this could mean that you will fall under a different regime.
Secondly: it is almost never advantageous to link a policy taken out before January 1, 1992 (Pre-broad reassessment regime; pre-Brede Herwaarderingsregime) to the principal residence.
The situation is less clear-cut for policies taken out between January 1, 1992, and January 1, 2001 (during the Broad reassessment regime; Brede-Herwaarderingsregime), and involves distinguishing between policies taken out before or after September 14, 1999.
Are you entitled to a box 3 exemption?
Policies taken out before September 14, 1999, are entitled to an exemption in box 3. This exemption is considerable: EUR 123,428. It is even possible for partners to apply a double exemption. This amount is not annually inflation-adjusted. If the value of your policy remains under the exempt amount, you will probably never have to pay return on investment tax; vermogensrendementsheffing. In that case, you would not gain anything by linking your policy to the principal residence in order to avoid return on investment tax in box 3. What should you do when the policy's value exceeds the exempt amount? Do you have multiple policies or have you received an exempt capital payment in the past? Then it would be worthwhile reviewing the options available. In that case, you may benefit from getting tax advice.
If you are not entitled to a box 3 exemption
A policy that was taken out on or after September 14, 1999, is not entitled to the box 3 exemption of EUR 123,428. In that case, it could be worthwhile to link the policy to the principal residence if the amount of tax-free assets in box 3 is exceeded (in 2012: EUR 21,139; for partners: double the amount). You may have been advised to not include a KEW clause straight away, as this would allow you more room to maneuver, and that you can always transfer the policy to box 1 once you have to start paying return on investment tax in box 3. However, as including a KEW clause after April 1, 2013, will have no tax effect, it may be worth considering linking your policy to the principal residence before April 1 next year.
Broad Reassessment policy without a KEW clause
With regard to a Broad Reassessment policy (Brede-Herwaarderingspolis) without a KEW clause, it may be advisable to link this policy to the principal residence if the following situation arises. This policy may or may not be entitled to an exemption of EUR 123,428 in box 3 (depending on when it was taken out), but it is also entitled to an exemption of EUR 123,428 in box 1 (provided premiums are paid annually during a period of 20 years or longer, whereby the highest premium does not exceed 10 times the lowest premium). As with the exemption in box 3, the exemption in box 1 is not annually inflation-adjusted.
The position taken by the Dutch tax authorities is that the frozen amount of EUR 123,428 must be applied in respect of the exemption in box 1, rather than the exemption that applies to the KEW. The KEW exemption in box 1 is adjusted annually for inflation and is therefore currently much higher: EUR 154,000. Partners can apply double the amount, provided they each are entitled to half of the paid out amount. Or, in insurance jargon, they must both be beneficiaries. If you can benefit from this difference in the amount of the exemptions, then you should most definitely consider linking your policy to the principal residence.
Has your policy been changed in the interim?
The abovementioned rules of thumb may not apply if your tax regime has changed. That can be the case if you have extended the term of the policy, increased the insured amount, or have breached the permissible ratio of highest to lowest premiums.
Thoroughly weigh the pros and cons
When weighing the pros and cons, do not forget that there is also a negative side to a KEW. Will you be able to repay the mortgage when the policy matures? Will you still own a principal residence at that time? And do you want to repay the mortgage, or would you rather use the payment for other things? If you don't repay the mortgage, then the KEW policy payment will not be exempt and will be taxed! Think before you act ... a wrong decision can have considerable tax and therefore financial consequences.