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If I am a beneficiary of a life policy will I be taxed?
Key takeaways
- Life policy proceeds paid to you will not attract income or capital gains tax. You will only pay tax if any future investments made with the proceeds earn interest, dividends or capital gains.
- You may be liable for estate duty if the deceased’s estate exceeds the estate duty exemption of R3.5 million and up to R7 million in the case of the second-dying spouse.
As a beneficiary you won’t pay income tax or capital gains tax (CGT) on a 
pay out you receive from a life insurance policy. This is because your premiums are paid with after-tax money.
However, if you invest the money and earn returns on it, the returns - income and dividends - may be taxable.
Estate duty
The benefit paid out of a life policy will, however, be included in the deceased’s estate, even if it is paid out directly to a beneficiary. Life benefits paid to a beneficiary are deemed to be part of the estate and will therefore increase the value of the estate.
The estate may attract estate duty if the amount distributed exceeds the estate duty exemption (R3.5 million or up to R7 million in the case of a second-dying spouse’s estate which has the benefit of an unused portion of the exemption of the first-dying spouse).
Estate duty is levied at 20% of amounts that exceed the exemption and at 25% on amounts that exceed R30 million.
If there is estate duty due, it may be apportioned between the estate and you, as the beneficiary of the policy.
The executor of the estate has a right to recover this estate duty arising from the policy proceeds from the person who is entitled to the proceeds. There is a formula in the Estate Duty Act that must be used to determine how much is recoverable by the executor.
The executor of the estate will inform you, as a beneficiary, how much you will need to pay to the South African Revenue Services in estate duty.
The executor may not, however, charge executor’s fees on the amounts paid directly to you, as a beneficiary but if an attorney or professional adviser performs any services related to the proceeds, they may be entitled to charge a fee, depending on the circumstances.
Excluded from your estate
Benefits paid out on a policy that an insured person did not take out or on which they did not pay any premiums may also be deemed to be part of their estate unless they are:
- Policies that meet the exemption for insuring the life of a key person in a business;
- Policies for insuring the life of a business partner and providing funds to fulfil a buy-and-sell agreement; or
- Are recoverable under ante-nuptial contracts.
