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Is your long-term insurance policy pay-out taxable?

Wondering about the tax implications of your long-term insurance policies? Read our simple guide.

12 September 2017
2 minute read

calculator with letter blocks spelling out tax

It’s tax season, and you might be wondering about the tax implications of your long-term insurance products. Here is a simple guide to your policies - and what is and isn’t taxable and tax deductible.

 Tax and long-term insurance lump sum pay-outs
When you receive a lump sum pay-out from any long-term insurance policy, that pay-out is not taxed. The same tax rules apply to all long-term insurance products, including:

  • Life insurance
  • Funeral cover
  • Dread disease cover and disability insurance
  • Expense protector policies (also known as income protection)

The full pay-out is yours to use as intended - to supplement lost income, or pay off debts, for example.

 

 

As the benefit is not taxed, you cannot claim the premiums as a tax deduction.

Claiming for your long-term insurance premiumsAs the benefit is not taxed, you cannot claim the premiums paid for these insurance policies as a tax deduction. So, there is no tax on the pay-out and no tax deduction for the expenses. This is why 1Life does not issue tax certificates.

Here’s an example of how it works:

  • You pay R200 a month for life cover of R1 000 000.
  • When you complete your annual tax return you cannot claim R2 400 (R200 x 12 months) as a deduction.
  • When your beneficiary receives the lump sum pay-out of R1 000 000, they receive the full amount without any tax deductions.

Tax tips

  • Pay-outs from insurance policies are not taxable income and so they don’t need to be declared to SARS. However, you should keep the details of your pay-out in a safe place – the policyholder, policy number, amount and date of pay-out - in case you are asked where the funds came from. 
  • If you decide to invest the lump sum pay-out, the income and dividends received from the investment, and any capital gain, may be taxed.
  • Tax laws can and do change. For instance, prior to March 2015, if you received a monthly pay-out from an expense protector policy, that pay-out was taxed. You could also claim the premiums paid towards expense protector policies as a tax deduction. Now, these policies are treated like all other long-term insurance products. There is however, currently no indication that the tax laws regarding long-term insurance will change.

If you’re looking to find what you can claim for, here is a list from SARS:

  • Pension fund contributions
  • Retirement annuity fund contributions
  • Provident fund contributions
  • Legal costs – under certain qualifying circumstances
  • Wear–and-tear – in respect of certain assets
  • Donations – to approved bodies
  • Repayable amounts – amount received for services rendered as refunded by that person
  • Bad and doubtful debts – employment related.
  • Medical expenses, in some cases. Use the handy medical aid tax credits calculator at taxtim.com to see if you qualify for a tax deduction on your medical expenses.

The bottom lineRemember that the purpose of long-term insurance is to protect you and your beneficiaries from financial hardship. It’s good to know that the full amount of the benefit will be available in a time of need.

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