scheme offering life and lump-sum disability benefits.
FROM TAX FOR THE PROCEEDS
The changes to the Income Tax Act that will be introduced next year are designed to ensure that if you contribute to an assurance policy using after-tax income and without a tax deduction, the proceeds of the policy paid to you or your dependants will be tax-free.
However, if your premiums were funded with before- tax contributions or with a tax deduction, the policy proceeds will be taxable.
This means that where your contributions to an income protection policy are tax deductible, the proceeds – the monthly income you receive if you are disabled – will be taxable.
If your employer pays contributions to an unapproved group life scheme as a benefit for you, it was unclear after last year’s changes whether or not the proceeds of the group life policy – when and if they were paid to you – would be tax-free.
The changes to the Income Tax Act that take effect on March 1 make it clear that if your employer pays the policy premiums and you pay fringe benefits tax on these premiums, the proceeds will be tax-free.
Daffue says where the proceeds of a policy are paid out first to an employer and then to the employee’s beneficiaries or deceased estate before March 1 next year, the proceeds will in all likelihood be taxed in the hands of the deceased’s estate.
However, he says, if the policy provided for a payment directly to a deceased employee’s estate or beneficiaries, the proceeds would be tax-free.