Yes, life insurance premiums will generally be tax deductible to your super fund if the life insurance policy is paid for by the fund, and insuring a member of the fund. The premiums will thus be deductible to the relevant complying super fund. However, life insurance premiums for policies held in your personal name are generally not tax deductible.
| Life insurance outside of super | |
|---|---|
| Life insurance premiums | Not tax deductible |
| Life insurance benefits | Payouts are generally not taxed |
| Life insurance inside of super | |
| Life insurance premiums | Premiums are typically tax deductible (to the fund) |
| Life insurance benefits | Payouts could be taxed if paid to non-financial dependents |
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Life insurance tax deduction rules: Understanding ATO
The general rule is that if you purchased life insurance outside of your Superannuation and pay for it personally, there is no tax on the death benefit proceeds. However, your premiums are not tax deductible as they are considered personal expenses.
On the other hand, if your life insurance was purchased through your super fund and you pay your premiums with your superannuation monies your fund can claim a tax deduction on the premiums paid by the superfund.
Taxation rules for life insurance policies held outside Super
Life insurance
When life insurance is personally owned, premiums are not tax deductible, but the benefit payout is generally tax-free.
Income Protection
According to the ATO, you can claim the cost of any premiums you pay for insurance against the loss of your income. This is because income protection benefits act as an income replacement. Make sure to include any monthly benefit payments (should you go on claim) you received under the policy on your tax return as these benefits are taxable.
Trauma Insurance
Generally, premiums are not tax-deductible because the ATO does not see such a policy as protecting your personal exertion income. Trauma insurance benefits are therefore generally not taxable.
Total and Permanent Disablement Cover
Premiums paid for a personally owned Total and Permanently Disablement (TPD) policy will generally not be tax deductible, but the benefit payout will usually be tax-free.
Taxation rules for life insurance policies held within Super
Life insurance
If you pay your life insurance premiums with your superannuation monies then your premiums are usually tax deductible to your fund.
Your life insurance benefit will only be paid tax-free when it is left to a financial dependant such as your spouse or children under the age of 18. Meaning, benefits left to your business partner or adult children will be taxed at a rate of up to 35%.
Trauma Insurance
Trauma insurance is no longer available for purchase through a super fund.
Total and Permanent Disablement Cover
When purchased through your super fund you will generally be required to pay tax on the TPD benefit payout. However, premiums paid might be fully tax-deductible depending on your insurer’s definition of TPD. As of 2011, not all TPD insurance premiums are fully tax deductible and not all lump sum benefits are taxable.
Any Occupation: 100% of your TPD premium is tax deductible. A TPD benefit will usually be paid if you are totally and permanently disabled and unable to work in any occupation reasonably suited to you by education, training and experience.
Own Occupation: 67% of your TPD premium will be tax deductible when it is a stand-alone policy funded through your super fund. However, when combined with life cover 80% of your premium might be tax deductible.
Generally, Own Occupation TPD provides you with the highest opportunity of a successful claim because TPD criteria are based your inability to perform your own occupation. However, Own Occupation TPD is only available to certain occupation categories and not offered by all companies.
As of 1 July 2014 Own Occupation TPD is no longer available for purchase through your superannuation.
Income Protection or Salary Continuance
If your income protection policy is held within your super and premiums are paid by the fund, then your premiums are tax-deductible to your fund and not to you personally.
However, when income protection is held inside your superannuation, you have to meet certain conditions of release before a benefit will be paid.
- Meet the insurer’s policy definition of a claimable event or condition.
- Comply with the rules in the Trust Deed.
- Meet the definition of release as per SIS (Superannuation Industry Supervision) legislation.
Once your income protection claim is accepted by the insurer, the benefit is paid to the trustee of the fund. Depending on the extent that the payment satisfies a permitted condition of release by the trustee and SIS the benefit could be paid either fully, partially or not at all.
Concessional Contributions
Concessional contributions are pre-tax contributions made to your superannuation fund (you can pay insurance premiums with these monies) and are subject to a contribution cap. Meaning, a limit is set on the contribution amount you can make per year.
Contributions can be made via:
- Your employer’s compulsory contributions of 9.5%.
- Any additional contributions by your employer.
- Any salary sacrificed contributions that you arrange for your employer to deduct from your salary (before tax).
For 2017/2018 the annual concession contribution cap is $25,000 which applies to all age groups. As of 1 July 2017, all eligible Australians younger than age 75 can claim tax deductions for personal super contributions, subject to the annual concessional contribution cap.
Is life insurance tax deductible for a business owner?
When you own a business and take out life cover for revenue purposes (for example, replacing income should a key person die) any benefits received will be assessed as income and thus be taxed, but the premiums you pay will generally be deductible.
On the other hand, if you take out cover for a capital purpose (for example, paying outstanding business debts) then the payout will not be tax assessable (depending on who receives the benefit), therefore the premiums are generally not tax deductible.
What deductions can I claim?
What deduction you can claim depends on your circumstances, the type of cover you have and whether the cover was purchased inside or outside your super fund. You might be able to claim for the cost of any premiums paid to an insurer to protect your income should you be unable to work for a period of time.
It’s best to wait for your relevant insurer to send you a statement highlighting the premiums you’ve paid and which funds were allocated to which specific policy type.
Life insurance tax deductibility is a complex process and will be different for each person based on your specific circumstances. We encourage you to seek professional taxation advice to help you navigate these complexities.