By William van Wyk
We don’t wake up every day thinking about life insurance, do we?
In fact, months and even years can roll past without us even thinking about spending money on a policy. Then one day we find ourselves seriously contemplating our mortality and the implications of leaving our loved ones behind in a sticky financial situation as many South Africans do. That’s the day we 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) a life insurer undertakes to pay out the sum assured, when we pass away to beneficiaries we’ve nominated in our policy.
Provided we’ve been honest and upfront about all our health issues when taking out a life policy and the premiums are up to date when we pass on, the people who matter most to us will inherit a substantial amount of money.
So, the one-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, but it all depends on one thing:
Who do we choose to leave the money to?
Let’s clear up some of the misconception and use a few examples to better explain when life insurance proceeds become taxable.
Life insurance proceeds are not taxable if left to a spouse as these are deductible in terms of Section 4Q of the Estate Duty Act.
This section of the Estate Duty Act states that anything bequeathed to a spouse is not subject to Estate Duty Tax, regardless of amount. We could leave R10 000 000 to our spouse, and he or she wouldn’t have to pay a Rand over to the Government.
Let’s look at a quick example.
Desmond is married to Mirella, and they have two small children. Desmond has worked out that if he passes away, Mirella 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 Mirella and the kids.
Desmond has made Mirella the sole beneficiary on his life insurance policy and if he passes away, the insurer will pay the R5 000 000 to Mirella. What’s important to note is that even though the R5 000 000 falls into Desmond’s estate, it is fully deductible (Section 4Q) since it is being left to Mirella.
The converse is that if we do not nominate a beneficiary, the proceeds of the policy will be paid into our estate and will be subject to Estate Duty and will attract executors’ fees.
If there is no spouse, and the 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 the estate)
Conclusion:
When we die, the value of all assets (including life insurance policies) form part of our Estate Duty calculation.
The value of any asset left to a spouse/partner is deductible in terms of Section 4Q of the Estate Duty Act.
Life insurance left to other beneficiaries besides a spouse/partner will be subject to Estate Duty if the value of the estate exceeds R3 500 000.
Life insurance left to the estate will also attract executors’ fees at 3,5% ex VAT.
Make sure that you check the beneficiary nominations on your life policies!
If you would like us to check your policies for you or If we do not have a life policy in place, please speak to us. Morebo can help. Just send us a mail on info@morebo.co.za and we will get back to you.