Answer to the question "Is life insurance tax deductible?" is complicated and ultimately for many people it depends on whether or not your insurance is obtained in retirement.
Life insurance premiums are usually not tax deductible if you bought insurance directly from an insurance company.
If you are self-employed and your life insurance is issued by a pension fund, all payments made to finance insurance premiums are tax deductible.
One example of tax deductible protection is income insurance. The ATO has allowed such claims in certain circumstances, even though the insurance itself does not "earn" income for the taxpayer.
Taking out lost income insurance allows a tax deduction for insurance premiums related to this type of insurance. For small businesses, ensuring the ability to generate income can result in a tax deduction for insurance premiums that include fire and theft, motor vehicle, public liability and lost profits.
Income insurance is often offered along with death or disability insurance. Lump sum payments in the event of death or disability are "capital" in nature. Therefore, it is important to note that only the income protection part of the insurance premium can be deducted from the tax.
Your insurer should be able to give you a breakdown. Generally, any claim made under this type of policy is assessable income and must be reported on your income tax return for the year you receive the payment.
For businesses, "key person" or "key person" insurance is popular because even the temporary loss of key people can be financially damaging to a business.
To deduct premiums, the policy coverage must relate to "income" - for example, the policy must state that the policy covers lost business income or profits due to the death or disability of a major policyholder.
Are Income Protection, Trauma and TPD Insurance Premiums Tax Deductible?
So we know the status of life insurance, but what about other premiums? Other types of life insurance, such as income protection, trauma and TPD insurance, have different factors when it comes to tax deductible premiums.
Trauma insurance is currently not available in retirement, so its premiums cannot be deducted. TPD insurance is tax free only if issued during retirement.
Employment insurance reflects life insurance in the sense that it is tax-free at retirement. The tax discount also applies to an entrepreneur who buys income insurance directly from the insurer.
Why Is Life Insurance Tax Deductible?
Life insurance premiums are taxable only if they relate to the earning of assessable income, or if a financial advantage is necessary for carrying on a business to earn assessable income. While life insurance affects your income, tax benefits apply.
Why is Income Protection Insurance Tax Deductible?
Tax deductions can be made on income protection premiums, as benefits act as replacement income.
All premiums paid for income protection policies may be claimed back and benefits received are taxable as your ordinary taxable income.
Will I Pay Tax on Benefits?
If you or your family are eligible for benefits after you apply, whether or not you have to pay tax on those benefits depends on the type of insurance you bought, how you bought it, and your employment relationship.
There is no tax on life insurance benefits, but if the insurance is purchased in retirement, this only applies if the beneficiary is financially dependent.
TPD is the only other form of insurance where you do not have to pay benefit tax and this only applies if the policy is purchased outside the retirement period.
The TPD insurance provided by the pension requires payment of tax on benefits and the same applies to income insurance. As far as life insurance is concerned, this only applies to policyholders operating as a FIE, if the insurance is retired.
Income and trauma insurance purchased outside Super is taxed on all benefits.
Should I get Cover through Superannuation if the Premiums are Tax Deductible?
Just because pension insurance premiums are tax deductible doesn't mean it's right for you. In most cases, only the basics are covered and the level of protection obtained is not enough.
Also remember that you will also have to pay for life insurance in retirement if you are not financially dependent. If the insurance is bought outside the old age pension, you don't have to pay tax on the benefits.
What’s the Best Way to Work Out Tax Deductions for my Insurance?
Speak with an experienced tax or financial adviser to receive qualified information on the status of tax deductibility for your life insurance.
They will be able to recommend the best avenue for you to ensure you get the most benefit possible out of your life insurance policy.
However, if the insurance protects losses that are more "capital" in nature (for example, a lump sum is paid to the estate of a key person), then the insurance premiums may not be tax deductible.
If one policy offers both types of coverage, the premiums must be divided to calculate the deductible.
We recommend that you seek advice specific to your situation to ensure that your insurance cover is suitable for your needs.
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