Life insurance isn’t something you get all warm and fuzzy about, is it?

We all pay our premiums diligently, every month, and if some ill feeling or resentment starts to surface, we palm it off and remind ourselves that our families financial security is at stake.

Luckily, life insurance, as a concept, is easy to understand:

In exchange for a premium (generally paid monthly) our life insurer promises to pay out a pre-determined Rand amount to our nominated beneficiaries when we pass away.

If we hold up our end of the bargain:

  • Pay our premiums when they are due
  • Tell the truth at the time of taking out the policy

Then we can expect our loved ones to receive a substantial payment. Pretty straightforward, right?

How much life cover do you have in place? A couple of million?

With that amount of money changing hands, you must believe the South African Revenue Services has an eagle eye on the proceeds.

The million Rand question is – are the life insurance proceeds taxed?

The short answer to this is – it depends on who the money is left to.

Let’s clear up a few misconceptions with some facts. There are 4 things you really need to understand:

  • When you die all your assets (including your life insurance policy) form part of your Estate.
  • Any assets left to a spouse/partner are deductible (exempt) in terms of Section 4Q of the Estate Duty Act.
  • Life insurance left to any other beneficiaries, besides a spouse/partner, could be subject to Estate Duty, if it exceeds the R3 500 000 abatement (the portion above R3 500 000).
  • Life insurance left to your Estate can attract Executors Fees at 3,5% ex VAT

When a taxpayer dies, that person is called a “deceased person” according to SARS, and all his / her assets, on the date of death, will be placed in an Estate. This Estate is commonly known as a “deceased Estate” and will include, amongst other things, immovable property such as your house and movable property, like cars, furniture, investments, cash in the bank, as well as the proceeds of your life insurance policy.

But if the life insurance proceeds have been left to your spouse/partner, they will be exempt from any Estate Duty Tax (which we will get to in a little bit) because of a little deduction known as Section 4Q.

The take-away is this – leave your life insurance to your spouse/partner and no tax is applicable, regardless of the amount. A R20 million Rand life insurance policy could pay out to your spouse and SARS can’t tax it.

What happens if you don’t nominate a beneficiary on your life insurance policy? Then the money that pays out will form part of your Estate.

If you don’t have a spouse, and your Estate is worth more than R3 500 000, then Estate Duty will be levied.

How much Estate Duty will be charged? 20% of anything in excess of R3 500 000 (and we are talking about the gross value of your Estate)

You can see how this quickly becomes problematic. Too many assets left to your Estate can push the value of your Estate over the R3 500 000 mark very quickly.

Then SARS will be in line to collect.

Make sure you check your beneficiary nominations on your life insurance policy after reading this.

Interested in getting a comparative life insurance quote? Leave your details here.

Until next time.

The MoneyShop Team