Tax and SARS knowledge base
Tax treatment of employer-owned insurance policies
How is an employer-owned insurance policy treated for tax?
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Direct answer
An employer-owned insurance policy can create a taxable fringe benefit where the employer pays premiums for a policy relating to an employee's or director's death, disability or severe illness for that person's direct or indirect benefit. SARS says the employer may deduct the premiums, but there is a simultaneous fringe-benefit inclusion for the employee. The fringe benefit arises monthly.
The policyholder and named beneficiary do not settle the matter by themselves. SARS says that if the employer is the named beneficiary but has an arrangement to pay the proceeds to the employee, the tax treatment should be the same as if the insurer had paid the employee directly. A lump sum may be exempt only where the relevant statutory requirements are met. The employer must apply for a tax directive where a lump-sum policy payment is payable to an employee.
What this means in practice
There are several insurance arrangements commonly called "company life cover". Their tax results can be very different. This article is restricted to a policy that benefits an employee, director, dependant or nominee. It does not determine the treatment of a policy genuinely held for the company's own benefit, often described as key-person cover.
When the policy directly or indirectly benefits the employee, SARS's current PAYE guide links the premium deduction to a monthly taxable fringe benefit. This can feel counterintuitive: a premium can be deductible for the employer while still being a taxable benefit to the employee. Payroll must therefore receive the policy and premium data as the premiums are paid, not only when a claim arises.
At payout, the history becomes important. SARS describes exemptions for certain policy lump sums, including a section 10(1)(gH) exemption that depends on the policy relating to death, disablement or severe illness of an employee, director or former employee or director, and on no policy premiums having been tax deductible to the policyholder from 1 March 2012. There is also a separate section 10(1)(gI) exemption described in the guide. Do not rely on the label "life policy" or "employee benefit" without reviewing the wording and premium history.
Step-by-step
- Obtain the complete policy file. Collect the policy schedule, terms, endorsements, beneficiary nomination, employer resolution and employee agreement. Identify the policyholder, insured life, named beneficiary and any person who is contractually entitled to proceeds.
- Establish whose benefit is protected. Record whether the policy's direct or indirect benefit is for the company, the employee or director, dependants or nominees. If the company receives proceeds but must pay them over to an employee, include that agreement in the file.
- Review premium treatment. List each premium, payment date and accounting or tax treatment. If the policy relates to an employee benefit, payroll should assess and process the monthly fringe benefit as SARS describes. Keep the calculation and the employee's contribution, if any.
- Keep payroll and policy data aligned. SARS's guide identifies taxable employer-owned-policy fringe benefits under source code 3801. Confirm your current payroll configuration before the IRP5 is finalised. A policy administrator and payroll team should reconcile the total premiums and monthly benefit amounts.
- Pause before a claim payment. When a lump sum becomes payable to an employee, do not guess its tax treatment. Gather the payout notice, policy history and beneficiary evidence, then apply for a SARS tax directive as required by the employer guide.
- Complete the reporting. SARS identifies reporting outcomes for taxable and non-taxable policy proceeds. Use the directive, the policy review and current reporting specification to determine the correct certificate treatment. Retain all correspondence and payment evidence with the employee's file.
Documents and records to keep
Keep the policy contract, proposal, amendments, premium invoices, payment proofs and accounting treatment. Retain beneficiary nominations, side letters, board resolutions and employee communications that show who benefits. Maintain the payroll calculation, monthly fringe-benefit records, IRP5 data, tax directive and claim or payout notice.
The evidence must cover the policy's full history, not just the current premium. That is particularly important if an exemption is considered, because SARS's guidance refers to premium deductibility from a specified historical date.
Important limits and exceptions
An employer's premium deduction does not prove that the employee has no taxable benefit. Nor does a payment to the employer prove that the employee has no interest in the proceeds. The policy, beneficiary arrangement and premium treatment must be read together.
This guide does not provide a blanket exemption for death, disability, illness or unemployment payouts. The statutory conditions differ, and the guide describes both section 10(1)(gH) and section 10(1)(gI). A policy that has been changed, assigned or funded through different entities needs particular care. It may also be necessary to distinguish a pure risk policy from other insurance products.
When to get tailored advice
Seek specialist tax, insurance and legal advice before starting a director policy, changing a beneficiary, deducting premiums or paying a claim. A review is essential where the company is the named beneficiary but has an obligation to pay an employee, the policy has existed for many years, or a large lump sum is expected.
TaxProof can help organise policy documents, premium evidence and payroll records. We cannot interpret an insurance contract, determine a policy exemption or obtain a SARS directive without the appropriate authority and specialist input.