SA's No 1 Insurance Blog

Life insurance payouts can be pretty hefty. I mean really big numbers that run into millions and millions of rands. One of the questions I always get is “Will the life insurance proceeds be taxed when it pays out?” And here I’m specifically talking about the policy being subject to estate duty. Well, it depends on who is receiving the money at claim stage! Is it your spouse or estate?

If you leave the proceeds of your life insurance policy to a spouse then the pay-out isn’t taxed. That’s a pretty important bit of information. That’s why if you’ve got a life insurance policy in place, you’ve got to be sure you’ve checked beneficiary nominations.

If no beneficiary is nominated then the proceeds of the policy will automatically be paid into your estate. This will be “deemed property” in your estate and could become dutiable (death tax needs to be paid on it). “Ouch!” I hear your squeal. You see the first R3,500,000 in your estate is exempt from estate duty, the balance is taxed at 20%. However, if you leave everything to your spouse then no estate duty is levied at all.

Let’s have a quick look at a few scenarios that will better explain what I’m going on about.

Scenario One

Jack has a R2,500,000 life insurance policy in place on his life. Jack’s wife Melinda has been nominated as the sole beneficiary. Jack dies, Melinda collects the R2,500,000 (and it’s tax-free). The life insurer simply pays out directly to her. It’s the simplest setup.

Scenario Two

Jack has a R2,500,000 life insurance policy in place on his life but he didn’t nominate Melinda as the beneficiary. Actually, there is no beneficiary nominated on the life insurance policy at all. So when Jack dies, the life insurer pays out the money to Jack’s estate. Jack has a valid Will in place and left everything to his wife Melinda. So although Jack’s estate was worth R6,000,000 no estate duty is payable. Why? Because if you leave everything to your spouse when you pass away, no estate duty is payable.

Scenario Three

Jack isn’t married but has a daughter from a previous relationship. Jack has a R2,500,000 life insurance policy in place on his life and has left the proceeds of the policy to his estate (his daughter is the sole heir). Jack dies and the insurer pays out the money into his estate. In terms of his Will a testamentary trust needs to be set up for the benefit of his young daughter, but before he can do that, the executor needs to see if any estate duty is applicable. Jack has a house worth R2,500,000 plus this life insurance policy of R2,500,000. So that’s a total asset value of R5,000,000. There aren’t any other allowable deductions Jack’s estate qualifies for, so after the rebate of R3,500,000, the balance of Jack’s estate is taxed at 20%. That’s R1,500,000 taxed at 20% = R300,000.

So you could argue that the proceeds of the life insurance policy were actually taxed along with all of Jack’s other assets that fell into his estate (after the R3,500,000 rebate).

This is what you need to remember. If you nominate your spouse as the beneficiary for proceeds, no tax applicable. If you don’t nominate a beneficiary, the money is going to form part of your estate and could well become taxed as part of “Estate Duty”. If you nominate anyone else but your spouse as the beneficiary, the proceeds will be included for estate duty purposes.

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