Is Life Insurance Tax Deductible?

Understanding what Life insurance tax obligations you might have can be a concern for many policyholders. We understand that you want to protect your loved ones while also making smart financial decisions.

In this article, we’ll explore what you can claim on your tax return and clarify the rules around life insurance premium tax deductions. We’ll also look at how taxes apply to different types of policies, including Total and Permanent Disability Insurance, Income Protection Insurance, and Trauma Insurance.

Understanding these rules can help you optimise your coverage, provide more for your loved ones, and potentially save money on your taxes.

We are not tax advisers and this article cannot provide advice relevant to your individual circumstances. While we have endeavoured to state the general rules as at the date of this article, you should consult a tax adviser for advice on your specific situation.

What types of life insurance products are tax deductible?

Some life insurance premiums can be tax deductible – it depends where you purchase it and what type of coverage you choose.

Tax deductions on insurance premiums from outside super

When you take out life insurance, total and permanent disability (TPD) Insurance, or trauma insurance outside your superannuation, the premiums you pay are generally not tax-deductible.

However, the good news is that income protection Insurance premiums are usually tax-deductible, as long as you acquire the cover outside of your super. According to the Australian Taxation Office, you can claim these premiums on your annual tax return.

Just remember to declare any monthly benefit payments your income protection insurance policy provides. Additionally, if your policy pays lump sums as compensation for illness or injury, the premiums for those are not tax-deductible.

Tax deductions on insurance from inside super

• If you purchase life insurance, trauma insurance, or TPD insurance through your superannuation fund, the premiums are typically not tax-deductible.
• If you take out income protection insurance via a superannuation fund and use your super contributions to pay the premiums, these premiums cannot be deducted from your personal income.

This is because usually the premiums are paid out of gross income and erode your superannuation concessional contributions cap.

However, if your life insurance is held within a Self-Managed Super Fund (SMSF), the SMSF may be able to claim the premiums on its annual tax return under certain circumstances.  Be sure to consult with a financial planner for information on taxation of Life Insurance that you bought through an SMSF.

You can find more information about taking out NobleOak Life Cover within an SMSF here.

Are life insurance payouts taxable in Australia?

We understand that making sure your loved ones will be financially secure can bring much-needed peace of mind. Navigating the details of the taxation of life insurance payouts can seem overwhelming — but rest assured, we’re here to simplify it for you.

When life insurance payouts are tax-free

Payouts from some types of life insurance policies are typically tax-free, especially when they are paid to someone who is financially dependent on you. This is generally true for:

• Life insurance policies
• Trauma insurance
• Total and permanent disability (TPD) insurance

However, claims made under income protection insurance are unlikely to be tax free.

Also, if a payout is made to someone who is not financially dependent on you, it may be subject to tax – depending on the type of payout. You’ll need to check your policy to see who qualifies as a financial dependant:

• Spouses are usually considered dependents
• Children over the age of 18 may not always be regarded as financial dependents

Tax on life policies through superannuation funds

Life insurance tax obligations are different if you purchase your policy through a superannuation fund rather than directly from a direct life insurer.

If you have a life insurance policy through your superannuation fund, your benefits will be paid to your nominated trustee. There are special rules for who the trustee can then pay the proceeds to:

• Consider setting up a binding death benefit nomination with your superannuation trustee to direct who will receive the payout.
• Seek advice from a financial adviser or your accountant for guidance.

Life insurance tax outside of superannuation

If your life insurance policy is held outside of superannuation, the proceeds are generally paid tax-free. However, there is an exception when the cover is implemented for business purposes (for example, a business owns the policy and the insured person is a ‘key person’ such as a director).

Tax and income protection insurance

Income Protection Insurance pays a monthly benefit (which can be up to 70% of your regular before-tax income) if you can’t work due to a serious illness or injury. This offers peace of mind, but it’s important to know the key differences between tax on life policies and income protection insurance.

Are income protection insurance premiums tax-deductible?

Income protection insurance premiums are generally tax-deductible, with some exceptions. Premiums paid through superannuation funds are not tax-deductible if:

• Premiums are deducted from your contributions
• Your policy pays you a lump sum to compensate you for an injury

Tax deductions are more complex if you hold cover through a Self-managed Superannuation Fund (SMSF). Unique tax obligations can affect both the insured party and the trustee who will receive any payouts, so be sure to seek advice from your account to make the most of your policy.

Paying tax on income protection payments

Any payments you receive from income protection Insurance are generally considered taxable income. This applies whether your policy is held inside or outside of superannuation. You must declare any payment you receive on your tax return.

Tax and trauma insurance

Trauma Insurance offers valuable financial support during some of life’s most challenging moments, helping to ease the burden of a serious medical diagnosis such as cancer, heart attack, or stroke. With a lump sum payment upon diagnosis, it can provide peace of mind, allowing you to focus on your health and recovery.

Are trauma insurance premiums tax deductible?

No. You cannot claim a tax deduction on trauma insurance premiums.

Tax deductions on insurance premiums are generally only available when a policy is designed for income replacement. Trauma Insurance can help reduce your financial stress by covering the costs of expensive medical treatments and lifestyle changes – but it doesn’t replace your income.

Are trauma insurance benefits taxed?

No. The great news is that trauma insurance lump sum benefits are generally not subject to income tax.

Trauma insurance and superannuation

Under Australian law, trustees of industry, retail, or Self-Managed Superannuation Funds (SMSF) can no longer take out new trauma insurance policies.

However, if you had trauma insurance through your super fund before 1 July 2014, you can continue to hold this cover. Accessing and taxing the proceeds will depend on your personal circumstances, and we recommend consulting your accountant for tailored advice.

Total and permanent disability (TPD) insurance and Tax

Total and Permanent Disability (TPD) Insurance offers vital financial support during difficult times when you’re no longer able to work due to a serious illness or injury. We understand this can be overwhelming, so it’s important to be aware of how tax applies to TPD premiums and payouts. Knowing where you stand can help you feel fully prepared, both financially and emotionally, if the unexpected happens.

Are TPD Insurance premiums tax deductible?

It depends.  TPD insurance provides crucial financial protection during life-changing events and understanding how premiums are treated for tax purposes is important for peace of mind. For most people insuring themselves, TPD insurance premiums are not tax deductible. However, there are exceptions that may apply in certain situations:

• If you’re purchasing TPD insurance for business purposes
• If your policy is held within a Self-Managed Superannuation Fund (SMSF) or otherwise through superannuation

In these cases, your tax situation may differ. We recommend seeking advice from your accountant to make the most of your cover.

Will my TPD insurance benefit be considered taxable income?

Total and Permanent Disability Insurance (TPD) can offer essential assistance during challenging times, so it’s important to understand how the benefits might be taxed. Knowing what to expect can help you feel more secure and prepared for your financial future.

Here’s what you should keep in mind:

• If you hold TPD insurance outside of super, benefit payments are generally tax-free.
• If you’re purchasing TPD insurance for business purposes, your tax situation may be different.
• If your TPD cover is held inside a Self-Managed Superannuation Fund (SMSF) or otherwise through superannuation, taxes may apply to the proceeds, depending on factors like your age at the time of claim.

For personalised guidance on your tax situation, we recommend seeking advice from your accountant to ensure everything is handled with care.

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Disclaimer: Any financial product advice is general in nature only and does not take into account your individual circumstances, objectives, financial situation, or needs. Before acting on it, please consider the appropriateness of the information, having regard to those factors. Any third party websites or tools referred to are subject to their own terms and conditions and NobleOak Life Limited makes no representation or warranty as to any information on those websites. Persons deciding whether to acquire or continue to hold life insurance issued by NobleOak Life Limited should consider the relevant Product Disclosure Statement and Target Market Determination for the product. Please also consider NobleOak Life Limited’s Financial Services Guide. NobleOak Life Limited ABN 85 087 648 708 AFSL 247302.