Is Life Insurance Tax Deductible?
Yes, if your life insurance policy is paid for by your superannuation fund and insures you as a member of the fund, your premiums will generally be deductible to the fund. These deductions are typically paid directly to the super fund However, if you have a life insurance policy that you pay for personally, your premiums typically won’t be tax deductible.
Published January 27, 2021
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Understanding the ATO life insurance tax rules
The Australian Taxation Office (ATO) is the primary revenue collection agency of the Australian Government. They generally determine which regulations you’ll need to adhere to when claiming taxes on your life insurance policies. Typically, you’ll need to keep the following rules in mind for insurance tax deductibles:
Rules for life insurance tax outside of superannuation:
- 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 your income loss. This is because income protection benefits act as an income replacement. Make sure to include any monthly benefit payments (should you claim) you received under the policy on your tax return as these benefits are taxable.
- Trauma Insurance: Generally, premiums for a personally owned policy 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.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.
Rules for tax within superannuation:
- Life insurance: If you pay your life insurance premiums with your superannuation fund, 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 financially dependent spouse or children under the age of 18. Meaning, benefits left to your business partner or adult children will be taxed.
- 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 when withdrawn from your super fund. However, premiums paid might be fully tax-deductible depending on your policies definition of TPD. As of 2011, not all TPD insurance premiums are entirely 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. - Income Protection: 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 release conditions before a benefit is paid.
1. Meet the insurer’s policy definition of a claimable event or condition.
2. Comply with the rules in the Trust Deed.
3. Meet the definition of release as per SIS (Superannuation Industry Supervision) legislation.
Once the insurer accepts your income protection claim, the benefit is paid to the fund’s trustee. Depending on the extent that the payment satisfies an acceptable condition of release by the trustee and SIS, the benefit could be paid either entirely, partially, or not.
Annual tax statements are generally sent out 1-2 months following the end of the financial year by the insurer. You should take these to your accountant when preparing your tax return, and they will be able to confirm if the premiums are tax-deductible and includable in your tax return or not.
How is life insurance taxed?
| Type | Will I pay taxes on benefits? | Are premiums tax-deductible? |
|---|---|---|
| Life insurance (Outside super) | ||
| Life insurance (Inside super) | (May have to pay taxes if paid to a beneficiary who is not financially dependent on you) | |
| Income (Outside super) | ||
| Income (Inside super) | ||
| Trauma (Outside super) | ||
| Total and Permanent Disablement Cover (Outside super) | ||
| Total and Permanent Disablement Cover (Inside super) |
Do beneficiaries pay taxes on life insurance payouts?
Depending on your policy, whether it’s held inside or outside your superannuation fund, beneficiaries may have to pay taxes. However, if the life insurance premiums are paid within the super fund, beneficiaries will not have to pay taxes when the payout is paid to a financially dependent person.
Claiming your premiums on your tax return
Annual tax statements are generally sent out annually 1-2 months following the end of the financial year by the insurer. You should take these to your accountant when preparing your tax return, and they will be able to confirm if the premiums are tax-deductible and includable in your tax return or not.
Tax for business owners
A business owner can take out life cover as revenue protection for the business, which generally means the benefits received will be included in the business’ assessable income. However, the premiums they pay are usually deductible. Alternatively, if a business owner takes out cover for capital reasons, the payout and premiums are usually not deductible on your taxes.
Frequently asked questions and answers
Is life insurance tax-free to the beneficiary?
If the beneficiary is financially dependent and life insurance premiums were bought within the superannuation fund, life insurance is generally tax-free to the beneficiary.Can life insurance premiums be tax deductible?
Life insurance premiums are usually only tax deductible if the life insurance premiums were bought inside the superannuation fund.Are life insurance premiums tax deductible for self-employed individuals?
Life insurance premiums are not usually not only deductible for self-employed persons unless it is a policy to protect the revenue of business’s revenue, and the policy is owned and paid for by the business. If their life insurance policy precisely protects its business assets or employees.
*Disclaimer: The information in this article is general in nature and does not take into account your personal circumstances, financial situation or your specific needs. It is not tax advice and you should engage in the services of a professional tax advisor before making any decisions about the information contained herein.
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what happens if you have a Super Term Life Cover and are paying the premiums for this as concessional contributions – the premium is more than the $25,000 concessional contributions cap – how can I get around this
Hi Tracey.
Please contact your accountant or a tax specialist for guidance regarding your query as we are not tax professionals.
However, generally, when premiums start to get too high and interfere with people’s investment strategies within their super fund we start to notice that people either move part or all of their cover from a super ownership structure to self-owned policy structure or reduce their cover.
For my life insurance in Hong Kong, I have to pay a premium and levy every year. In return, the life insurance company will advise the guaranteed cash value, dividend and guaranteed cash payments in each anniversary statement. I suppose that the premium and levy are not tax-deductible, how about the increase in guaranteed cash value, dividend and guaranteed cash payments as part of them are actually the premium and levy I paid to the company.
Hi William.
We only work with Australian insurance. Please contact your Hong Kong life insurance provider for information regarding your taxes.