You don’t wake up every day thinking about life insurance, do you?
In fact, months and even years can roll past without us even thinking about spending money on a policy. Then one day you find yourself seriously contemplating your mortality and the implications of leaving your loved ones behind in a sticky financial situation. That’s the day you decide to take out life cover.
Now, the concept of life insurance is easy enough to understand.
In exchange for a premium (usually paid monthly) your life insurer undertakes to pay out a sum assured, when you pass away, to beneficiaries you’ve nominated in your policy.
Provided you’ve been honest and upfront about all your health issues when taking out your life policy and your premiums are up to date when you pass on, someone in your life (perhaps more than one person) stands to inherit a substantial amount of money.
This is the million Rand question:
Are life insurance proceeds taxable?
I mean, what is the point of taking out R2 000 000 life cover if SARS is going to take some of it when it pays out, right?
The truth is, life insurance policy proceeds can be taxable and it all depends on one thing:
Who are you leaving the money to?
Let’s clear up some of the confusion and use a few examples to better illustrate when life insurance proceeds become taxable.
Life insurance proceeds are not taxable if left to your spouse because they are deductible in terms of Section 4Q of the Estate Duty Act.
If you leave your life insurance proceeds to your spouse/partner, the money is not subject to Estate Duty Tax, regardless of amount. You could leave R10 000 000 to your spouse, and he or she wouldn’t have to pay a Rand over to the Government.
Let’s look at a quick example.
Thabo is married to Lindiwe, and they have two small children. Thabo has worked out that if he passes away, Lindiwe will need R5 000 000 to square off the outstanding bond on their house and a few other smaller debts. The balance of the money will need to be invested to create an income for Lindiwe and the kids.
Thabo has made Lindiwe the sole beneficiary on his life insurance policy and if he passes away, the insurer will pay the R5 000 000 to Lindiwe. What’s important to note is that even though the R5 000 000 falls into Thabo’s estate, it is fully deductible (Section 4Q) since it is being left to Lindiwe.
If you don’t nominate a beneficiary, your life insurance proceeds will be paid into your estate and could be subject to Estate Duty and will attract executors’ fees.
What happens if you don’t nominate a beneficiary on your life insurance policy? Then the money that pays out is paid into your estate.
If there is no spouse, and your estate is worth more than R3 500 000, then Estate Duty will be levied.
How much Estate Duty is charged?
20% of anything in excess of R3 500 000 (and we are talking about the gross value of your estate)
- When you die, the value of all assets (including life insurance policies) form part of your Estate Duty calculation.
- Any assets left to a spouse/partner are deductible in terms of Section 4Q of the Estate Duty Act.
- Life insurance left to other beneficiaries besides a spouse/partner could be subject to Estate Duty if the value of your estate exceeds R3 500 000.
- Life insurance left to the estate will attract executors’ fees at 3,5% ex VAT.
Make sure you check the beneficiary nominations on your life policy!
Feel free to leave a comment below. We will make an effort to personally respond to everyone.
Until next time.
The Wise About Life Team