Are life insurance premiums tax-deductible?
Life insurance products come in many different forms. Whether your premiums are tax deductible primarily depends on:
- The type of life insurance you have
- If you have a standalone policy or one funded through superannuation
Here's how it works:
Click on the tabs below to see how tax is treated for life insurance premiums and benefits.
| Type | Standalone or super policy? | Are premiums tax-deductible? |
|---|---|---|
| Life Insurance | Standalone | No |
| Super | Yes (if you're self-employed) | |
| Trauma Insurance | Standalone | No |
| Super | N/A* | |
| TPD | Standalone | No |
| Super | Yes (if you're self-employed) | |
| Income Protection | Standalone | Yes |
| Super | Yes (if you're self-employed) |
| Type | Standalone or super policy? | Will I pay tax on benefits? |
|---|---|---|
| Life Insurance | Standalone | No |
| Super | No (if the beneficiary is a financial dependant) | |
| Trauma Insurance | Standalone | Yes |
| Super | N/A* | |
| TPD | Standalone | No |
| Super | Yes (for self-employed policyholders) | |
| Income Protection | Standalone | Benefits are taxed |
| Super | Yes (for self-employed policyholders) |
*Trauma insurance is no longer available through superannuation.
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Life insurance tax overview
Life insurance is it tax deductible? The answer is sometimes ... the answer is complicated. Generally, income protection insurance policy premiums are tax deductible. Trauma insurance or diagnosis insurance cover is not tax deductible. Life insurance and total and permanent disability (TPD) insurance when taken out separately on a standalone is also not tax deductible.
However, if you have a superannuation fund through your employer or if you are self-employed, then life insurance and TPD might become tax deductible. For income protection insurance, the premiums are always tax deductible whether it is a standalone policy or under superannuation.
Life insurance options that are tax deductible
If you want to take advantage of tax benefits when paying insurance premiums, you need to understand the types of life insurance that are tax deductible. Life insurance is an umbrella term. There are additional options available with term life insurance policies including total and permanent disability (TPD), income protection and trauma cover.
- Generally, income protection insurance is tax deductible whether taken out as a standalone policy or under your super.
- Life insurance, trauma and TPD are only tax deductible when taken within the superannuation policy and trauma cover is not tax deductible.
Is life insurance through superannuation tax deductible?
- Premium payment may be tax deductible
It is important to remember that the default life cover provided through super funds is in most cases just basic cover and may not provide an adequate level of protection when it comes time to claim. It should also be noted that the benefit payment of policies can be subject to tax if the beneficiaries are not financial dependents. This includes:
- Not a spouse
- Over 18 years old
- Not financially dependent on the policyholder
If any of the above applies, the benefit can be subject to a tax has high as 16.5%.
Concessional Contributions
In order to benefit from tax deduction on the cost of life insurance held within your superannuation, the premiums have to be paid by the fund through in what is known as a concessional contribution. This simply means it has to be a pre-tax contribution.
There are some conditions and restrictions after the age of 65:
Concessional caps
| Income Tax Year | Age | |||
|---|---|---|---|---|
| Under 50 | Age 50 to 59 | 59 years or over on 30 June 2013 | 49 years or over on 30 June 2014 | |
| 2015-16 | $30,000 | $35,000 | ||
| 2014-15 | $30,000** | $35,000 | $35,000 | **$35,000 |
| 2013-14 | $25,000 | $25,000* | *$35,000 | |
You will need to be clear how much you can contribute contribute to your superannuation so that all the rules governing your fund are complied with.
Although you should go to an experienced financial or taxation adviser to obtain qualified information on your life insurance tax deductibility in your individual situation, in most cases you are generally unable to claim any deductions off your taxation liabilities for any life insurance premiums you had paid in the previous financial year. The same applies to premiums paid for critical care insurance or trauma insurance, in fact any total and personal disablement type of insurance. On the other hand premiums paid for income protection policies are fully claimable and the benefits are taxable as part of your normal taxable income.
