Being part of the list of beneficiaries of a life insurance policy is a gift that a loved one hopes will help you financially.
While adding people as beneficiaries to your life policy is a way to offer them a financial safety net, it is also crucial to know if any taxes could affect the payout. Here is what you need to know.
Will life insurance payouts be 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. If a beneficiary is nominated the life insurance payout, it will be a deemed an 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.
Estate duty effects on a life policy payout
Estate Duty is part of the inheritance tax that is levied on property. 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 divided 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.
What if you have not selected a beneficiary?
With no beneficiary nominated the life insurance payout will increase the value of your estate which could also increase executor fees payable. When no beneficiary is nominated the pay-out will form part of your estate and the estate duty calculation will determine the tax payable.
