Because life insurance payouts in Australia generally don’t attract tax payments, many people presume this is the case with all life insurance, which is not the case. Thus, in purchasing policies they are not as informed as they might be. Then, there’s also the question of what types of life insurance premiums are tax deductible? Let’s investigate this area and answer some of these questions.
Firstly, whether or not tax needs to be paid on the benefits depends very much on what type of life insurance policy or policies you have, who purchased it, and how it was paid for.
Yes, most life insurance payouts are tax free, especially if they are paid to a partner or child who was financially dependent on the insured person at the time of passing. But there are of course exceptions. If a life insurance policy has been purchased through a super fund, and the beneficiary is going to be a non-financially dependent beneficiary, it may well attract a tax of up to 30%. This is something to take into consideration when taking out a policy, calculating the amount of cover and whether you feel it will be adequate for the needs of your beneficiaries, once you deduct the 30% they might have to pay in tax.
Now, what if we’re talking income protection? That is, an insurance payout paid to you in the event that you are injured and cannot work, that comes to you regularly like a wage would. Well, in that case you have to pay tax on that amount just like you would on any normal salary.
While on the subject of people taking out life insurance, that might also own their own business, or be a sole trader, be aware you may be able to tax deduct premiums for life insurance held within super. But premiums for other forms of insurance like: trauma cover, TPD or term life insurance, held outside of super, will typically not be tax deductible.
Then there the aspect of what’s known as concessional contributions. These are pre-tax contributions you might make to your superannuation fund. These could be a combination of normal savings you are making, combined with insurance premiums you are paying through your fund. But be aware you might only be able to make concessional contribution of up to 45% to 50% more per annum before you will start to attract extra taxes, and these limits can change every year, along with age guidelines. Here’s another interesting one: key person insurance, that is, insurance taken out by a business to protect it against the loss of a person who is considered vital to the success of the business because of their important skills. Because insurance such as this is seen as a strategy to minimize losses, life insurance benefits paid are counted by the ATO as income and are taxed accordingly.
It might be helpful at this point to review a quick checklist to make things really clear:
Type of insurance where premiums are tax deductible
- TPD inside super.
- Income protection outside super.
- Income protection inside super.
- Life insurance inside super, (but only in some cases.)
Premiums that are not tax deductible
- Life insurance outside super.
- TPD outside super.
- Trauma cover outside super.
Benefits you would have to pay tax on
- TPD inside super.
- Income protection outside super.
- Income protection inside super.
Benefits you would not have to pay tax on
- Life insurance outside super.
- Life insurance inside super.
- Trauma outside super.
- TPD outside super.
The above are just a few very general points around life insurance and taxes you will or won’t have to pay with various policies. When you get into the real detail, unless you’re an expert, it can get confusing and it’s easy to make a mistake that can have far reaching financial implications. Luckily at SMFS Insurance Partners our consultants have been helping people for years decipher the complexities of tax law relating to life insurance. Our team is only a phone call or website enquiry away, and we’re ready to help you now. Call us now on (07) 3064 0413 or use the contact us section of our website to make an enquiry.
