A divorce affects pension insurance (a Hungarian tax-advantaged pension insurance contract) too – just rarely at the moment the parties expect. There is one name on the policy, the premium was debited from one bank account, and NAV (the Hungarian tax authority) transferred the 20% state tax credit on the basis of one person's tax return – so many people take it for granted that the contract belongs to the person in whose name it stands. Matrimonial property law, however, looks not at the policy but at what the value was created from, and when. As a broker, what I see is that the most costly mistake is caused by haste: the parties surrender the policy so that there is “something to divide”, and the repayment of the tax credit, the tax and the surrender charge together considerably reduce what the policy was worth. This article goes through the legal principle, the ways of dividing the policy and the three policy settings to deal with after a divorce.
- Premiums paid from joint income while the spouses were living together in the marriage – and the value built up on them – are typically joint property under Section 4:37 of the Hungarian Civil Code (Ptk.), even if only one name is on the policy; the part accumulated before the marriage is separate property.
- The policy does not have to be surrendered in order to divide it: the typical solution is that the policy stays in place and the other spouse's share is settled from other assets, or the insured person takes over the policy through a change of policyholder – surrender reduces the amount available for division through repayment of the tax credits increased by 20% and through tax.
- A beneficiary designation does not lapse automatically on divorce, and the 20% state tax credit always goes with the current policyholder: these two settings have to be sorted out separately after the divorce.
Joint or separate property? What the Civil Code says
Under Section 4:37 of the Hungarian Civil Code (Ptk., Act V of 2013), the spouses' joint property includes every asset that they acquire jointly or separately while the matrimonial property community exists, and the joint property belongs to the spouses undivided, in equal shares. In legal terms, a pension insurance policy is a claim of the policyholder against the insurer, and therefore an asset: if its premiums were paid from joint income while the spouses were living together in the marriage, the value built up in this way counts as joint property even if only one of them is named on the policy – in the words of the lawyer quoted on profitline.hu: if the contract was set up or added to while the property community existed, its value forms part of the joint property. Section 4:38 lists separate property: among other things, this includes assets already owned when the property community came into being, inherited property and property received as a gift, as well as assets acquired with the value of separate property and value that takes the place of separate property. So for a policy started before the marriage, the value accumulated up to the marriage is separate property, while the premiums paid during the marriage are joint; if the premium was demonstrably paid from an inheritance or from savings made before the marriage, that part may remain separate property – the burden of proof lies with whoever claims this. Two nuances: under Section 4:38(2), the profit from separate property that remains after deducting costs while the spouses live together is joint property, meaning that the return earned during the marriage on savings made before it may also be subject to division; and none of this applies in the same way to cohabiting (unmarried) partners – for them, when the relationship ends, division of the increase in assets can be requested in proportion to each partner's contribution to acquiring it (Ptk. Section 6:516). With a marital property agreement, spouses can depart from the statutory regime – if there is one, it is decisive.
What is the policy worth in the division – and why not surrender it?
What counts in the division is neither the total of premiums paid nor the future maturity value, but the current value of the policy, which in practice is described by two figures: the current savings value shown by the insurer and the surrender value. The two are not the same. The surrender value is the amount that can actually be taken out after costs, and especially in the first years it may fall well short of the theoretical savings – the details are in the article on cost elements. Which value serves as the basis for the property division is decided by the parties' agreement or by the court. The tax credit – up to HUF 130,000 a year, transferred to the policy by NAV – is part of the policy's value, so it is also included in the joint property if the premium on which it was claimed was paid from joint funds.
And this is where the classic divorce mistake comes in: surrender. If pension insurance ends without a pension benefit, Section 44/C of the Personal Income Tax Act (Szja tv.) requires the tax credits received earlier to be repaid increased by 20%, and – depending on the age of the policy – the gain is taxed as interest-type income (kamatjövedelem); the full bill is set out in the article on surrender. The surrender charge, the repayment of the tax credits and the tax together mean that the “let's split it in cash” solution gives both parties less than the policy is worth. If you want to avoid this loss, do not terminate the policy – account for it in the settlement.
Who gets the policy? Three solutions
The first and most common solution is that the policy stays with the person in whose name it stands, and the other spouse's share is settled from other items of joint property: the home, savings, or a one-off payment. Nothing changes at the insurer in this case: the policy continues, and the policyholder goes on claiming the tax credit against their own personal income tax. The second route is a change of policyholder. This is the obvious choice when the policyholder and the insured person are not the same person – for example, the husband paid for his wife's pension insurance as policyholder, following the logic of a policy taken out for a family member. The benefit of pension insurance is due to the insured person, so after a divorce the natural arrangement is for the insured person to take the policyholder's place: under the insurance rules of the Civil Code, the insured person may enter the contract at any time by a written declaration addressed to the insurer. By law, this requires the consent of neither the insurer nor the previous policyholder (although insurers' forms typically still ask for both parties' signatures); the insured person who enters, however, is jointly liable with the previous policyholder for the premiums of the current period, and must reimburse the previous policyholder for the costs spent on the contract, including the premiums paid – which, on divorce, can be settled as part of the property division. A change of policyholder is not a surrender, so it does not involve repayment of the tax credits; from then on, however, the new policyholder decides about future premiums and the tax credit, and the previous policyholder's share has to be settled in the property division. The third route is the court: if there is no agreement, the court decides on the division of property – according to the lawyer quoted, on the principles of proportionality, prudent management and fairness – and in that case the judgment may also determine what happens to the policy. In none of these cases is the insurer a party to the divorce: it accepts declarations from the policyholder and does not pay the other spouse directly – it is up to the policyholder to give effect to the agreement or the judgment at the insurer by making declarations.
Beneficiary, insured person, tax credit: three settings to sort out after the divorce
The first is the beneficiary. The death benefit goes to the person the policyholder has designated as beneficiary, and the Civil Code has no rule under which a divorce would cancel the designation: the designation stays in force until the policyholder changes it. If the former spouse remains on the policy, the death benefit is paid to them – not to the heirs, and not to the new family. A change requires the policyholder's written declaration and, if the insured person is not the same as the policyholder, the insured person's written consent as well; the procedure is described in the article on inheritance and beneficiary designation. The second is the relationship between policyholder and insured person: anyone who remains on a policy after the divorce as policyholder for their former spouse is still obliged to pay the premium, and the tax credit is charged against their personal income tax – so a decision on changing the policyholder is needed. The third is what happens to the tax credit during the year: the right to claim it always belongs to whoever paid the premium in question as policyholder. How the insurer certifies the two policyholders' payments in the year of the change varies from insurer to insurer – it is worth requesting the certificate in advance and having the tax return reviewed by your accountant. The payment method also needs updating: if the premium was collected from the joint account that is being closed, the policy may fall into premium arrears, which, as the article on premium holidays explains, also affects the tax credit.
What should you do now?
- Ask the insurer for a statement of value – savings value and surrender value – as at the date the couple stopped living together and as at today; this is the starting point for the division.
- Do not surrender the policy for the sake of the division until you have worked out with a lawyer and an accountant how much would remain after repayment of the tax credits, tax and costs; settling from other assets or changing the policyholder typically involves a smaller loss.
- Decide who the policyholder will be: if the insured person takes over, they make the declaration of entry in writing on the insurer's form (insurers typically also ask for the previous policyholder's signature); if the policy stays as it is, include the settlement in the agreement.
- Change the beneficiary, the contact details and the payment method – these are the policyholder's own declarations, and the forms are provided by the insurer; if you let me know, I help where I can with filling them in and forwarding them to the insurer.
- If there is a marital property agreement, or if you were cohabiting partners, the automatic rules described here work differently – there, the starting point is your own agreement or the Civil Code's rules on cohabiting partners.
As a broker, I can help with how the policy works, with interpreting the statement of value and with the paperwork towards the insurer; for the legal questions of the property division, a lawyer experienced in family law is the right partner, and for tax questions, your accountant.
Have a question about your own policy and situation? Book a free 20-minute consultation →
Sources
- Hungarian Civil Code (Ptk.) Sections 4:37–4:38 (spouses' joint property, separate property), Section 6:516 (property relations of cohabiting partners), Section 6:451 (the insured person's entry into the contract), life insurance rules (Act V of 2013)
- Personal Income Tax Act (Szja tv.) Section 44/C – pension insurance declaration, repayment of the tax credit increased by 20% (Act CXVII of 1995)
- ProfitLine.hu: What happens to pension insurance in a divorce? Rules of property division (Dr Erzsébet Bankovics-Balogh, lawyer)
