Is life insurance taxable in South Africa?
In short, no, if the pay out goes to a beneficiary. That doesn’t, however, mean tax may not be involved at all. It’s a widely held misconception that life insurance is only taxable when payable to an estate and not when payable to a beneficiary.
The misunderstanding arises because of the executor’s remuneration. If the proceeds devolve upon the estate, the executor is entitled to the 3.5% remuneration on them. If they devolve upon a nominated beneficiary, the executor is not entitled to the fee, presumably because he never takes possession of them.
The proceeds form part of the estate and are dutiable. Section 3(3) deems them to be property of the estate. There are, however, three exceptions.
First, if the amount accrues to the surviving spouse or child under an anti-nuptial contract (ANC). Second, if the policy was taken out by the business partner of the deceased, and the partner paid the premiums in order to acquire the deceased’s shares of the partnership. Third, if the policy was not taken out by or at the instance of the deceased, who bore none of the premiums, and none of the proceeds will be paid into the estate or to any relative or dependent of the deceased.
Finally, interest on pay outs are taxable. If the money is kept in a bank account and accrues interest, the interest will be taxable.
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