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Navigating Tax Efficiency in Insurance: Insights for Financial Advisers

Updated: Mar 27




In the intricate world of financial planning, understanding the tax implications of insurance is paramount for both advisers and their clients. Recent changes, particularly since March 2015, have altered the landscape of how income protection and disability policies are treated for tax purposes in South Africa. As financial advisers strive to provide holistic guidance, decoding these changes becomes essential.

Kobus Kleyn CFP® sheds light on the first hurdle—distinguishing between individual and group risk benefits. Pre-2015, employer-paid premiums for income protection policies were treated as a taxable benefit for employees. While the employee could claim a tax deduction for the premium, the benefit received was taxed. Post-2015, however, the tax dynamics shifted. The member remains taxed on the employer-paid premium, but the employee no longer qualifies for a tax deduction, and the benefit payout is now tax-free. This transformation not only impacts individuals but also places added responsibilities on employers, affecting skills development levies and unemployment insurance fund contributions.

Gavin Smith CFP® further navigates the tax landscape, affirming that individual premiums for death or disability have no income tax impact as they are typically paid from after-tax income. However, when it comes to a lump-sum disability benefit in the hands of the individual, there’s no income tax payable. Smith emphasises that while lump-sum disability benefits are tax-free, Estate Duty Tax implications may arise concerning life insurance payouts, potentially forming part of the deceased insured’s estate.

The crux of these tax adjustments lies in providing financial advisers with tools to educate their clients effectively. Advisers can guide clients on optimising their insurance portfolios for tax efficiency, considering the nuances of individual and group risk benefits. The ability to articulate the tax benefits of income protection policies, now tax-free upon payout, can be a game-changer for clients seeking robust financial planning.

In the evolving landscape of insurance and taxation, advisers must remain attuned to the latest changes. As Kleyn asserts, the increased tax burden on employers underscores the interconnectedness of financial decisions and broader economic contributions. Advisers equipped with this knowledge can not only enhance their value proposition to clients but also foster better-informed financial decisions in the long term.

In conclusion, this journey through the tax implications of disability insurance unveils a nuanced terrain. Financial advisers, armed with insights into the changes post-2015, are well-positioned to guide their clients towards tax-efficient insurance solutions. Navigating this landscape not only ensures compliance but also opens avenues for strategic financial planning, empowering advisers and clients alike in the pursuit of lasting financial security. Stokes, G. (2023). Few tax surprises in the world of disability insurance payouts. Feature: LIFE. Retrieved from https://media.licdn.com/dms/document/media/D561FAQGNScLNeOIQ6w/feedshare-document-pdf-analyzed/0/1693151764361?e=1712188800&v=beta&t=mCCv4lFcuAzHeIu88Dk33SOgO0vXKwcvPZnIsE2wr3U

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