Technically, beneficiaries are not liable for taxes on the life insurance proceeds they receive.
In other words, if the life cover was R1 million, you will receive R1 million.
The payment will be made directly to you or your trust by the life insurer as long as you or your trust are listed on the life insurance policy as the beneficiary. If no beneficiary has been named, the proceeds will be paid to your father’s estate, where the executor will take care of the distribution, in which case an executor’s fee will apply. No executor fees are applicable when beneficiaries have been named on life insurance policies.
The life insurance policy will, however, be considered a deemed asset in your father’s estate and may be subject to inheritance tax in his estate depending on the total value of the estate.
The following inheritance rights will apply:
- If the taxable value of the estate, including life insurance, is less than R3.5 million, no inheritance tax will be payable.
- For estates with a taxable value between R3.5 million and R30 million, 20% inheritance tax will be levied.
- For inheritance values over R30 million, inheritance tax of 25% will be payable on the amount over R30 million.
(See my comment below regarding spousal bequests under the Inheritance Tax Act, which has a major impact on determining the taxable amount of the estate.)
If inheritance tax is payable on your father’s estate, the executor will contact you for the prorated portion that the life insurance coverage contributed to the overall inheritance tax.
Neither you nor your trust will be liable for any other taxes, so it doesn’t matter whether you or your trust are the ultimate beneficiary.
Inheritance tax applies to any amount over R3.5 million that has been bequeathed to someone other than a spouse. Bequests to the spouse are not subject to inheritance tax under section 4(Q) of the inheritance tax law.
The policy proceeds will be paid out in full to the designated beneficiary, but the executor must account for the policy as a deemed asset in your father’s estate.
I would also like to touch on the life cover held by the fund…
Many people join a company pension fund which often includes risk benefits. Within the risk benefits there is normally life insurance which is determined by a multiple of the employee’s annual salary.
When setting up the fund, the employer has the option of selecting risk benefits as “approved” or “unapproved”. In short, the registered benefits belong to the fund and are subject to tax payable according to the retirement tax tables.
As life cover and pension fund proceeds will be bundled together, the tax can be as high as 36% on amounts over R1,050,000.
In addition, the proceeds will be considered a deemed asset and will incur inheritance tax in addition to tax payable. Again, if a spouse is the beneficiary, Section 4 (Q) will apply. Much like pension fund benefits, trustees will ultimately determine who benefits from the proceeds.
Payment can be a long affair. Unapproved benefits are “stand-alone” and are paid in the same manner as personally owned life insurance policies. Payment will be made according to the designated beneficiaries and no taxes apart from inheritance tax as in my explanation above will be applicable.
As can be seen above, there are many variables to consider. In order to determine if and what taxes will be payable, it makes sense to perform a proper risk analysis on your father’s financial affairs.
I hope I have answered your question properly.