If you’re getting a head start on prepping for tax season or have been thinking of ways to become more tax-efficient, you’ll want to be aware of the link between life insurance and taxes. Happily, we’ve got simple explanations for your most commonly asked questions.

Do You Need To Declare Life Insurance On Your Tax Return?

Many people wonder whether they need to declare their life insurance policy when completing their tax return.

In most cases, you don’t need to declare a personal life insurance policy on your SARS tax return because the policy itself isn’t considered taxable income. Likewise, beneficiaries who receive a life insurance payout generally don’t need to declare that payout as income either.

However, if the payout is invested and begins earning interest, the interest earned must be declared as part of your taxable income in future tax years.

Are Life Insurance Payouts Tax-Free?

Yes! In South Africa, life insurance payouts are tax-free. This means that if you had to take out R500 000 in cover with MiWayLife, that’s the exact amount your beneficiaries will receive in the event of a successful claim. In short, whatever the amount of cover you choose, it won’t be taxed, so your loved ones will receive the amount in full.

Is The Interest Earned On A Life Insurance Payout Taxable?

When you have a sum of money in the bank and it earns interest, this interest becomes taxable. So, if you were a beneficiary of a life insurance payout, you wouldn’t pay tax on that amount, but you would have to pay tax on any interest it would earn in the future.

Can You Claim Life Insurance Premiums Back From SARS?

The short answer is no. If you have a medical aid, you’ll know that you can get a little tax relief on them in the form of tax credits, essentially a deduction from the tax you owe the South African Revenue Services (SARS). You might think you’d be able to enjoy the same deduction via your life insurance premiums, but this isn’t the case.

Do Life Insurance Payouts Impact Your Estate Duties?

If you have a life insurance policy but don’t list a beneficiary, your payout will form part of your estate. This will increase the value of your estate which could also increase executor fees payable.

If you have nominated a beneficiary, the payout will be considered a deemed asset (any benefit received due to the death of the deceased) in your estate and won’t increase the estate’s value for the purpose of executor fees.

However, it will still be taken into account regarding estate duty, a type of tax that’s payable by deceased estates. This duty will be apportioned (shared) between the beneficiaries and the deceased estate, meaning that if the estate owes any money to SARS, the beneficiary of a life insurance payout is also liable to pay their share as determined by the executor of the estate.

Do All Estates Have To Pay Estate Duty?

Calculating an estate’s duty is an involved process but you’re allowed to deduct R3.5 million rand from the overall value of your estate. Of the remaining amount, 20% is payable to SARS, provided the value of the estate’s property doesn’t exceed R30 million. Of this 20%, the executor will determine what percentage the beneficiary of a life insurance payout needs to contribute.

This means that if your estate’s net value (the amount after allowable deductions, such as debts and funeral costs) is worth less than R3.5 million, you won’t be paying an estate duty.

Can Life Insurance Help Cover Estate Taxes?

Yes, life insurance can play an important role in estate planning. When someone passes away, their estate may need to cover expenses such as estate duty, outstanding debts and executor fees. A life insurance payout can provide the funds to help cover these costs so that your loved ones don’t have to sell assets like property or investments to settle the estate.

For many families, this makes life insurance an important financial planning tool, not just protection for loved ones.

The Bottom Line

While life insurance payouts themselves aren’t taxed in South Africa, there are still a few tax considerations to keep in mind. The good news is that life insurance remains one of the easiest ways to create a safety net to secure your family’s financial future. Why not get a quick quote from MiWayLife today and let us impress you with our surprisingly affordable premiums?

Did You Know:

You can now take out life cover with us online in a few simple steps. No calls and no agents! Make sure to take care of those you love today by buying MiWayLife cover online.