Tax breaks on in­come pro­tec­tion pol­icy pre­mi­ums could soon end

The govern­ment wants to grant you tax re­lief on the pay­outs of in­come pro­tec­tion poli­cies in­stead of the cur­rent re­lief you are get­ting on your con­tri­bu­tions, writes Laura du Preez.

Weekend Argus (Saturday Edition) - - PERSONALFINANCE -

In­come pro­tec­tion pol­i­cy­hold­ers may lose the tax de­duc­tion they en­joy for con­tri­bu­tions paid on th­ese poli­cies as early as next year if a pro­posed amend­ment to the In­come Tax Act is leg­is­lated as out­lined in the Tax­a­tion Laws Amend­ment Bill.

How­ever, in terms of pro­posed pro­vi­sions in the bill, which was re­leased for comment this week, should you be­come dis­abled, the monthly in­come you could re­ceive from one of th­ese poli­cies will be tax free from the tax year be­gin­ning March next year.

The pro­posed im­ple­men­ta­tion date is likely to be ques­tioned when the bill comes be­fore Par­lia­ment.

Nicholas van der Nest, the divi­sional di­rec­tor of risk prod­ucts at Lib­erty Life, says im­ple­ment­ing the pro­posal at such short no­tice will be a “sig­nif­i­cant chal­lenge” for life as­sur­ance com­pa­nies.

The ex­plana­tory me­moran­dum to the bill clears up con­fu­sion about how ex­ist­ing in­come pro­tec­tion poli­cies, on which you may have en­joyed tax de­duc­tions for many years, will be treated.

The me­moran­dum says there will be no tran­si­tional pe­riod and the new sys­tem will “op­er­ate cleanly go­ing for­ward”.

This means that no con­tri­bu­tions paid from the date when the new sys­tem be­comes ef­fec­tive will be tax de­ductible, and all pay­outs made from in­come pro­tec­tion poli­cies to pol­i­cy­hold­ers who suc­cess­fully claim af­ter be­ing dis­abled will be tax free.

There were con­cerns that pay­outs from ex­ist­ing in­come pro­tec­tion poli­cies would be partly taxed and partly tax-free in line with the pe­riod for which you did and did not en­joy a tax de­duc­tion on your pre­mi­ums, but the bill makes it clear that this will not be the case.

Van der Nest says life as­sur­ers who are mem­bers of the As­so­ci­a­tion for Sav­ings & In­vest­ment SA (Asisa) are analysing the im­pact of the change for pol­i­cy­hold­ers in terms of amend­ing the pre­mi­ums they pay and the im­pact on govern­ment in terms of the tax rev­enue it col­lects.

If the change is im­ple­mented, as an in­come pro­tec­tion pol­i­cy­holder, you will need to check on the monthly amount you can claim for dis­abil­ity, be­cause the amount for which you are cur­rently in­sured is based on pro­vid­ing a monthly pre­tax in­come, rather than the af­ter-tax in­come you will re­quire af­ter the change is im­ple­mented.

This means that if the amend­ment is im­ple­mented, you may be able to in­sure your­self for a lower amount, be­cause you won’t need to pro­vide for the tax on your in­come.

You need to be sure that you are not overin­sured – life as­sur­ers will gen­er­ally only pay you out an in­come of 75 per­cent of what you were earn­ing be­fore you were dis­abled. They do this to en­sure there is no in­cen­tive for clients to make op­por­tunis­tic claims on th­ese poli­cies. (Some po­lices make ex­cep­tions if you are tem­po­rar­ily dis­abled or if your dis­abil­ity is one from which you will never re­cover.)


Van der Nest says life as­sur­ers will have to con­tact all their ex­ist­ing pol­i­cy­hold­ers to in­form them of the change and find out whether they need to ad­just the in­come for which they are in­sured. This would be nec­es­sary to ad­dress the is­sue of overin­sur­ance and to en­sure pol­i­cy­hold­ers are treated fairly in line with the Treat­ing Cus­tomers Fairly prin­ci­ples that are to be leg­is­lated shortly, he says.

The ex­plana­tory me­moran­dum to the Tax­a­tion Laws Amend­ment Bill says the aim of the amend­ment is to in­tro­duce con­sis­tency in the tax treat­ment of all non-re­tire­ment fund dis­abil­ity and in­come pro­tec­tion poli­cies by deny­ing tax de­duc­tions for con­tri­bu­tions but al­low­ing pay­outs to be tax-free.

Cur­rently, some in­come pro­tec­tion pol­i­cy­hold­ers en­joy tax de­duc­tions while oth­ers do not. Ac­cord­ing to Asisa, the South African Rev­enue Ser­vice is also treat­ing the monthly in­come paid from in­come pro­tec­tion poli­cies dif­fer­ently. In some cases pol­i­cy­hold­ers who did not en­joy a tax de­duc­tion on their pre­mi­ums are also be­ing taxed on the pay­outs from th­ese poli­cies.

The tax de­ductibil­ity of con­tri­bu­tions may be a key at­trac­tion of in­come re­place­ment poli­cies, and there may be a shift to lump-sum dis­abil­ity poli­cies should the pro­posed amend­ment be im­ple­mented.

You should re­mem­ber that even if you lose the tax de­duc­tion for pre­mi­ums on your in­come pro­tec­tion pol­icy, this type of pol­icy may en­able you to match your cover to your in­come needs af­ter dis­abil­ity much more closely than you can with a lump-sum dis­abil­ity pol­icy. It may also of­fer pro­tec­tion against tem­po­rary dis­abil­ity, while lump-sum dis­abil­ity poli­cies pay out only on per­ma­nent dis­abil­ity.

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