Life Insurance at tax time
Brace yourselves: tax time is coming. In fact, it’s already here.
The questions that often arise at this time of year from our clients include ‘Are my Life Insurance premiums tax deductible?’ and ‘Are my benefit payments assessed as taxable income?’ The answer to these questions depends on a few things: the type of Life Insurance cover you have, whether you have purchased the policy as an individual or a business and whether or not your premiums are paid through your super fund.
We’ve prepared a handy reference guide for you, so that your next tax return doesn’t need to be quite so … taxing.
Life Insurance (also known as ‘term life’ cover) pays a lump sum benefit to your beneficiaries, in the case that you pass away or become terminally ill, helping to clear your debts and support your family.
Are Life Insurance premiums tax-deductible?
Generally, life insurance premiums are not tax-deductable. However, if you are purchasing Life Insurance for business purposes, or to be held within your Self-Managed Superannuation Fund (SMSF), then your tax situation may differ. We recommend that you seek advice from your accountant.
Payment of Life Insurance benefits
If you hold your cover outside of your superannuation, proceeds from your Life Insurance are generally paid tax free. A typical exception to this, though, is if your cover was implemented for business purposes (for example, a business owns the policy and the insured person is a ‘key person’ such as a director).
If your cover is held within your Self-Managed Superannuation fund, and paid to a Taxation Dependant as a lump sum, the proceeds are generally tax free. If proceeds are paid to a Non Tax Dependant, tax may be payable. We recommend that you seek advice from your accountant for your particular circumstances.
Income Protection Insurance
Income Protection Insurance pays a monthly benefit (up to 75% of your regular before-tax income) if you can’t work due to a serious illness or injury.
Are Income Protection Insurance premiums tax-deductible?
Income Protection Insurance premiums are generally tax-deductible. However, there are some exceptions to this, so you should understand the tax implications of how you buy your cover.
If you hold your cover through your Self-managed Superannuation fund (SMSF), the position can become quite complex, with tax considerations arising for both the insured person and the trustee, so it is advisable to seek advice from your accountant.
Payment of Income Protection Insurance benefits
If you make a claim on Income Protection Insurance, the benefit payments you receive, regardless of being held either inside or outside of superannuation, are generally taxable. You must include any payment you receive under such a policy on your tax return.
Trauma Insurance can help protect you financially against a wide range of critical medical conditions – including cancer, heart attack and stroke. Trauma insurance pays a lump sum upon confirmation of the diagnosis of one of the listed medical conditions.
Are Trauma Insurance premiums tax-deductible?
No. A key purpose of this benefit is to cover the costs of any expensive medical treatment and allow you to make lifestyle changes to help manage the financial impact of the condition – not replace your income. Because Trauma Insurance is not considered income replacement, the premiums for Trauma Insurance are generally not tax-deductible, according to the Australian Taxation Office (ATO).
Payment of Trauma Insurance benefits
While the premiums for Trauma Insurance are generally not tax-deductible, any lump sum benefit that is paid will generally not be subject to income tax.
Trauma Insurance and superannuation
It is no longer possible under Australian law for a trustee of an industry, retail or Self-Managed Superannuation Fund (SMSF) to take out a new Trauma Insurance policy.
However, those people who had Trauma Insurance in place through their super fund before 1 July 2014 may keep their cover, as long as this cover has been continuous. Subject to a condition of release under Superannuation Law being met, how the proceeds can be accessed and taxed will depend on your personal circumstances. We recommend seeking the advice of your accountant.
Total and Permanent Disablement (TPD) Insurance
If you become totally and permanently disabled and unable to work again due to sickness or injury, TPD Insurance provides a lump sum payment which will help you financially, for example to modify your home, replace lost income and clear debts.
Is TPD Insurance tax deductible?
TPD Insurance premiums are generally not tax deductible for most taxpayers insuring themselves. However, if you are purchasing TPD Insurance for business purposes, or to be held within your Self-Managed Superannuation Fund (SMSF), then your tax situation may differ. In this case, we recommend that you seek advice from your accountant.
Will my TPD Insurance benefit be considered taxable income?
If you have TPD outside super, benefit payments are generally tax free. If you are purchasing TPD Insurance for business purposes, then your tax situation may differ. Similarly, depending on your age at the time of claim and several other matters, if you hold TPD cover inside your Self-Managed Superannuation Fund (SMSF), you may be taxed on the proceeds.
In this case, and for all queries about taxation, we recommend you seek advice from your accountant.
Disclaimer: Please note that the information we have provided here is general information only and does not take into account your individual circumstances, financial situation or needs. We recommend that you seek expert advice from your accountant.