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.
- 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.