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Do you know if you could claim a tax deduction for your insurance premiums? With some policies, you may be able to claim some money back at tax time.
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- Do you know if you could claim a tax deduction for your insurance premiums? With some policies, you may be able to claim some money back at tax time.
- Why Is Life Insurance Tax-Deductible?
- Is Life Insurance Tax-Deductible Through Superannuation?
- Is Life Insurance Tax Deductible Outside of Super?
- Are Life Insurance Benefits Taxed in Australia?
- Will Your Beneficiaries Have to Pay Tax from a Life Insurance Payout?
- Who Can Make Deductible Contributions to Your Life Insurance?
- The Best Way to Work Out Life Insurance Tax Deductions
- References
There’s no definitive or one-size-fits-all answer as to whether life insurance premiums are tax-deductible. Generally, regular life insurance/life cover premiums are not considered a deductible expense.
However, there are four types of personal insurance all with different tax deduction rules.
Tax deductions depend on whether you’re self-employed, who your beneficiaries are, and whether you purchased your policy through your super fund.
In this article, we discuss the various insurance types and which ones are eligible for a tax deduction. We also discuss how tax deductions are applied, depending on your premiums, benefits, or beneficiaries.
Which Types of Life Insurance Are Deductible?
Premiums for certain types of life insurance are eligible for a tax deduction. Additionally, you can discover whether you will pay tax on the benefits/payout.
| Type of Life Insurance | Are premiums tax-deductible? | Will I pay tax on the benefits/payout? |
| Life Cover (outside of super) | No | No |
| Life Cover (inside of super) | Yes (in some cases) | No (if the beneficiary is a financial dependent) |
| Trauma (outside super) | No | No |
| TPD (outside super) | No | No |
| TPD (inside super) | Yes | Yes |
| Income Protection (outside of super) | Yes | Yes |
| Income Protection (inside of super) | Yes (to the Super fund) | Yes |
When Are Life Insurance Premiums Tax-Deductible?
The tax deductibility of your insurance premiums depends on the type of life insurance you hold.
When Are Life Cover Premiums Tax-Deductible?
Your life cover/death cover premiums are only tax-deductible to the super fund.
A superannuation fund is generally subject to a 15% tax rate on its income. Therefore, the tax deduction for the insurance premiums reduces the tax payable on this income by 15%. The superannuation fund generally passes back these tax savings to the member.
When Are Trauma Insurance Premiums Tax-Deductible?
Never. Trauma Insurance policy premiums are not tax-deductible.
When Are TPD InsurancePremiums Tax-Deductible?
Total and permanent disability insurance premiums are ONLY tax deductible to the super fund if your policy is purchased inside super.
A superannuation fund is generally subject to a 15% tax rate on its income. Therefore, the tax deduction for the insurance premiums reduces the tax payable on this income by 15%. The superannuation fund generally passes back these tax savings to the member.
If your TPD policy is held outside of super, it is not tax deductible.
When Are Income Protection Insurance Premiums Tax-Deductible?
If your IP is held inside your super, your premiums are tax deductible to the super fund.
If your IP policy is held outside of super, your premiums are personally tax deductible.
When Will Life Insurance Not be Tax Deductible?
Life insurance is NOT tax-deductible for:
- Life Cover outside of super
- Trauma Insurance
- TPD Insurance outside of Super
If you hold some life insurance through super, your super fund may be able to claim the tax deduction.
Super funds are generally subject to a 15% tax rate on income. Therefore, the tax deduction for the insurance premiums reduces the tax payable on this income by 15%. The superannuation fund generally passes back these tax savings to the member.
Why Is Life Insurance Tax-Deductible?
If your life insurance policy is connected to earning assessable or taxable income, or the monetary benefit is required to maintain a business earning taxable income, your insurance premiums are tax-deductible.
In other words, tax deductions apply to your life insurance premiums as long as your policy impacts your income.
Life insurance policies purchased through an insurer are typically not tax-deductible as they are not directly linked to employment income. Premiums for life insurance in these circumstances are considered a personal expense.
Essentially, unless you purchased your life insurance policy specifically for protecting business assets or your employees, your premiums as a self-employed individual or business may be tax deductible in certain circumstances.
Speak with a qualified Financial Advisor to discuss your insurance requirements and most suitable ownership structure.
I want to see all my options with the help of a Finance Expert
Call Our Team TodayIs Life Insurance Tax-Deductible Through Superannuation?
Super funds can offer:
- life cover
- income protection, and
- TPD insurance
These covers are paid for by the deductions from your pre-tax contributions.
According to the Australian Tax Office (ATO), life insurance policy premiums taken through your superannuation fund are generally not tax-deductible to you but they may be to your super fund.
Your fund usually pays life insurance premiums on your behalf to a third-party provider, and your fund can claim payments on tax.
Is Life Insurance Tax Deductible Outside of Super?
Premiums for life insurances held outside of your super funds are not tax-deductible with the exception of income protection insurance. Again, this is due to the direct correlation between employment income, which makes it an allowable deduction.
Life cover/death cover, critical illness/trauma insurance, and TPD are usually not tax-deductible outside super funds.
Are Life Insurance Benefits Taxed in Australia?
Life insurance benefits are often tax-free, particularly if they are going to a financial dependent (this could be your partner or children).
This is typically true for life cover, critical illness insurance and total permanent disability insurance. However, income protection benefits are unlikely to be tax free, and are often taxed on a monthly basis, similar to when you receive regular income.
Will Your Beneficiaries Have to Pay Tax from a Life Insurance Payout?
Life insurance benefits in Australia are usually tax-free, giving beneficiaries or terminally ill policyholders more discretion on spending their lump sum payment as needed.
Exceptions to the tax-free privilege given to taxpayers include the following:
- The beneficiary is over 18 and no longer financially dependent upon claiming the benefits
- A business owner is holding your life insurance policy for monetary value
- The executor of your will keeps the death benefits after you pass on
Who Can Make Deductible Contributions to Your Life Insurance?
In general, contributions for life insurance policies under your name are not tax-deductible.
However, you can use your pre-tax income to fund policies under your super fund. In this case, super fund contributions can be made by:
- Your employer
- Yourself, if you are self-employed
To fund your super-based insurance policy, you or your employer can withhold a part of your salary and transfer that withheld money to your super fund.
The Best Way to Work Out Life Insurance Tax Deductions
Obtaining professional advice from your financial adviser, a tax professional or an Insurance Adviser is the best way to manage your life insurance tax deductions and maximise your tax benefits.
Your financial adviser can help determine whether your insurance contributions, premiums paid or benefits are eligible for a tax deduction.
Advisers can also provide you with insurance quotes that best fit your needs and that of your loved ones.
Tax accountants provide sound tax advice to help you get the most out of your life insurance policy in a legal manner.
You can also speak with a qualified insurer to learn what options best fit your circumstances and whether the life insurance product you purchased is sufficient for your needs.
Compare policies from different providers to determine which one will give you the best value for your money.
Providers are required by law to provide you with a relevant Product Disclosure Statement (PDS) together with your chosen insurance product. Review the PDS for more detailed information about your product.
The best providers will also provide Target Market Determinations (TMD) tailored for specific products and customers. They also offer a financial services guide (FSG) featuring the provider’s services.
When in Australia, engage only with insurance companies that have an Australian Financial Services License (AFSL) and an Australian Business Number (ABN).
Still not sure where to start, or want help securing the right insurance faster?
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I want to see all my options with the help of a Finance Expert
Call Our Team TodayReferences
- Income Protection Insurance
- Occupation and Industry Specific Guides
https://www.ato.gov.au/Individuals/Income-and-deductions/Occupation-and-industry-specific-guides/
