Getting a head start on tax season? Here’s what you need to understand about life insurance and taxes. They say the only certainties in life are death and taxes so let’s talk about both!
If you’re prepping for tax season or have been thinking of ways to become more tax-efficient, here’s everything you’ll want to be aware of regarding the link between life insurance and taxes.
Life insurance and taxes in South Africa
Here’s the good news, 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.
Still, that doesn’t mean there aren’t any tax implications. Here are a few things to be aware of when it comes to life insurance and tax.
Interest earned on a life insurance payout is 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.
Life insurance payouts have an impact on 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.
Not all estates will have to pay estate duty
Calculating an estate’s duty is an involved process but you’re allowed to deduct 3.5 million rand from the overall value of your estate. Of the amount leftover, 20% is payable to SARS, providing 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 3.5 million, you won’t be paying an estate duty.
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.
