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Life Insurance
Is Life Insurance Taxed?
Is Life Insurance Taxed?
16 Nov 2018

If a loved one passes away and you receive a payment from their life insurance policy, do you have to pay tax on the amount?

The short answer, however, is that beneficiaries won’t pay income or capital gains tax on life insurance payouts that they receive from a policyholder. However, tax implications can be affected by the way that you have structured your life insurance policy that can affect the payout. Here is what you need to know. 


Are life insurance payouts taxed?

The short answer is that for income tax and capital gains tax purposes, life insurance pay outs are not taxable. However, life insurance pay outs do have an impact on your estate and estate duties.


When no beneficiary is nominated the pay-out will form part of your estate and the estate duty calculation will determine the tax payable.  With no beneficiary nominated the life insurance payout will increase the value of your estate which could also increase executor fees payable.


If a beneficiary is nominated the life insurance payout will be a deemed asset in your estate.  The deemed asset won’t increase the value of your estate for the purpose of executor fees but will be taken into account for estate duty. If you don’t nominate a beneficiary, it makes your estate amount bigger, and could increase executor fees.


However, it is important to note that the deceased estate isn’t liable for the full amount of payment of estate duty due to SARS if the proceeds of the policy were paid to a beneficiary (other than the estate).


Estate duty will be apportioned between the beneficiary and the deceased estate. This means that if there is money due to SARS as part of the estate duty, the beneficiary of a life insurance payout is liable to pay in their share. How is each share decided? The executor of estate will determine how much the beneficiary will be responsible for paying towards the estate duty.


Is the interest on a payout taxable?

Yes, if you inherit a sum and it gains interest in the bank, the interest will be taxable in the hands of the beneficiary as it is earned on the capital received.


How does the estate duty tax work?

This is quite a complex process. Essentially, you can deduct a total of 3.5 million rand from the overall value of your estate. Of the amount leftover, 20% is payable to SARS. This is known as estate duty. Of the 20%, the executor will determine what percentage the beneficiary of a life insurance payout needs to contribute.


Please note that while we do our utmost to keep our information as accurate as possible, this blog is not considered to be financial advice. It’s always prudent to consult a tax specialist when you are planning for your estate. 

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Terms and conditions apply. Eligibility, cover and benefits are determined on individual risk profile. MiWayLife is an authorised FSP (No. 45741) and its product offering is underwritten by Sanlam Life Insurance Limited, a registered long-term insurer. MiWayLife is a division of Sanlam Life Insurance Limited - Reg No. 1998/021121/06