Life cover: tax, beneficiaries and your bond

What is life cover?

If you die, the people who depend on you lose your income, but your debts remain. Life cover pays a lump sum when you die, so that your family has money to pay off debts such as your bond, to cover the costs of winding up your estate, and to replace the income they would lose.

You choose how much cover to take and who receives the money. You can name people as beneficiaries, or have the money paid into your estate to help settle debts and costs.

How does it work?

You pay a monthly premium. It depends on things such as your age, health, smoking, occupation and the amount of cover.
The insurer asks about your health and may ask for medical tests before it offers cover.
Some premium patterns start lower and rise every year with your age. Others stay level for longer, so they start higher.
You can often choose for your cover to grow each year, to help it keep up with inflation.

Answer health questions fully and honestly. If you leave out something that would have changed the insurer’s decision, it can turn down your family’s claim.

How is life cover taxed?

Premiums on cover you own on your own life are not tax-deductible.
The payout is not taxed as income for the people who receive it.
For estate duty, cover on your life generally counts as part of your estate, even when it is paid to a named beneficiary. Cover that goes to your spouse, or to a public benefit organisation, can be deducted.

Things to know

Cover through work. Group life cover usually ends when you leave your job, and it may not be enough on its own.
Your bond. You do not have to take your bank’s credit life insurance. You can use your own policy instead, if it gives at least the required cover. You would then cede it to the bank, which gives the bank first claim on the payout for what you still owe.
Keep beneficiaries up to date. Check them after a marriage, a divorce or a new child.
Cover can last for decades. Check that the premiums will stay affordable as they increase.

Who it suits

Life cover suits anyone whose death would leave a spouse or partner, children or business partners with less income, or with debts such as a bond to settle.

If no one depends on you yet, disability and income protection often matter more, because your own income is what most needs protecting.

Sources

Questions people ask

How much life cover do I need?

Enough to pay off your debts, cover the costs that come with a death, and replace the income your family would lose for as long as they would need it. The right figure is different for every family, so it is worth calculating it with a needs analysis rather than using a multiple of your salary.

Is a life insurance payout taxed?

It is not taxed as income. For estate duty, however, cover on your life generally counts as part of your estate, unless it goes to your spouse or to a public benefit organisation.

Do I have to take the bank’s credit life insurance?

No. You can use a policy of your own choice instead, new or existing, as long as it gives at least the cover the credit life rules require. The bank must then accept it.

Can an insurer refuse to pay a claim?

Yes. It can refuse, for example, if you did not disclose something that would have affected its decision to cover you, or if the claim falls under an exclusion in your policy.

Should my estate be the beneficiary?

Sometimes. Cover paid into your estate gives your executor cash for debts, fees and taxes. Cover paid to the people you name goes to them directly instead.