With effect from the first of March 2015, new rules governing the tax treatment of premiums and proceeds from income protection policies came into effect. Here is a summary of the new rules and their implications.
Tax deductibility of premiums
Premiums you pay for income protection policies are no longer tax deductible if you are a "natural person" - that's "human being" in legal-speak. You will no longer receive contribution certificates for submission to SARS from your insurance company.
If your employer pays premiums on your behalf for Income Protection, which is common as part of group insurance or retirement funds, the premiums will be viewed as a fringe benefit and taxed as part of your income. That means less take-home pay.
Premiums paid by legal entities (E.g. companies) for company owned Overheads Protection policies will still be tax deductible for the company.
Taxation of income
If you claim on your income protection, the income you receive will be exempt from tax.
Proceeds of company owned Overheads Protection policies will still be taxable since the premiums are still tax deductible.
Cover Limits
Limits on the amount of cover you can claim on have always applied in the past. These may change under the new regulations. Insurance companies have different ways of applying limits so there is no general rule to work with. Here is an example of how Momentum has adjusted the way it applies the cover limits:
Before the changes
You could claim 100% of your before-tax income for two years and thereafter, 75% of your before-tax income. (inflation adjustments would be allowed).
So if you earned R10 000 per month, you could have cover of R10 000 for two years of a claim, which would reduce to R7500 after two years.
After the changes
You could claim 100% of your after-tax income for two years and thereafter, 75% of your after-tax income. (inflation adjustments would be allowed). The standard tax tables would be applied to determine the after-tax income. If your circumstances are such that this would not be practical, various workarounds are in place to ensure fair cover is offered.
So if you earned R10 000 per month, you could have cover of R8874 (Net salary using 2015 tax table) for two years of a claim, which would reduce to R6655 after two years. These proceeds would not be taxed.
Implications for clients
If you were insured to the maximum limits before 1 March 2015, you are probably over-insured under the new rules. Momentum has said it will honour claims for clients who are now over-insured because of the rule change, but will apply the limits to all new applications. When you next review your portfolio, you should check whether your cover should be adjusted in line with your needs and the limits now in place.
If you were under-insured, you are likely to be in a better position than you were in February.
It is not an urgent matter as you can expect fair treatment by your insurance company, but it is a good idea to check your cover levels when you next review your insurance policy with your professional advisor.
The above is not intended as advice - you should seek advice from your professional advisor before taking action.
