Many people are unaware they may be eligible for a tax deduction on their life and income protection insurance premiums. However, tax deductions depend on the type of insurance policy and whether premiums are debited inside or outside superannuation. For this reason, the rules around tax-deductible insurance premiums can be confusing, so let’s break them down. But first, what is life insurance?

What are life insurances?

Life insurance is a term that refers to a wide range of products that can provide funds to cover different events. This could be a lump sum payment if you die or suffer a traumatic illness like cancer, or a monthly benefit if you cannot work due to illness or injury.

The most common life insurance products are:

Life (or death) insurance

This insurance pays a lump sum to your nominated beneficiaries if you die or are diagnosed with a terminal illness.

Income protection insurance

Pays a monthly benefit, typically up to 70% of your income, if you’re temporarily unable to work due to illness or injury.

Total and permanent disability insurance (TPD)

Offers a lump sum if you are permanently unable to work due to injury or illness.

Critical illness (trauma) insurance

In the event of a major medical incident like a heart attack, stroke or cancer, this insurance covers you financially.

Tax deductions on life and income insurance

Depending on the life insurance policy type, each brings its own tax implications for both premium and benefit payments. For clarity:

  • Premiums refer to the regular payments you make to maintain your insurance coverage. They may be weekly, biweekly, monthly, quarterly, biannually or annually.
  • Benefits refer to the payout you get if you or your nominee make an insurance claim.

Generally, life insurance, critical illness and TPD insurance purchased outside your super are not tax deductible. According to the ATO, insurance premiums outside of super can only be tax deductible if they are paid to protect your income (ie. income protection).

Is life insurance tax deductible through super?

At this time, personal and life insurance policies are not tax deductible through super. The ATO reasons the insurance cost comes from your superannuation balance rather than your income. However, there are differences in tax treatment of super owned policies, depending on whether they are held through an industry fund, as a stand alone retail policy, or owned by a self-managed super fund (SMSF). If you’d like to know more about claiming tax deductions on insurance premiums within an SMSF, our experienced financial advisers and tax accountants are just a phone call away.

Is life insurance tax deductible outside of super?

Life insurance such as trauma insurance, TPD and death cover is not tax deductible outside of super. However, the rules can differ when it comes to income protection insurance.

According to the ATO, income protection insurance premiums (bought outside of your super fund) are generally tax-deductible if paid during the financial period you file your annual income taxes. The premiums you pay relate to your income; therefore, the ATO allows the deduction.

Will my life insurance benefits be taxed?

Whether or not your benefit payout is taxed depends on the type of insurance policy. Take income protection insurance, for example. Your monthly benefits are likely to be taxed like a regular income. Conversely, benefits paid from life insurance, TPD, and other life insurance policies are usually tax-free, even when paid directly to a dependent spouse or child.

As mentioned earlier, the exception is when life insurance is bought through your super fund. In that scenario, if the beneficiary is an adult not classed as a financial dependent, the tax-free status may change. In some instances, the beneficiary could pay up to 30 per cent tax. That’s why you should seek advice from an accountant or financial planner when taking out personal insurance.

Tax deductions for bundled insurance

Some people who need the protection of multiple insurance products choose to combine them into one convenient bundle. Not only does bundling reduce the overall premium, but it also offers the convenience of making one payment. However, when it comes to tax deductions on your bundled policy, you’ll need to know how the relevant premium payments are structured.

For instance, you’re only allowed to deduct the proportion of your premium payments related to your income protect­ion coverage. So, let’s say you pay an annual premium of $300 per month for your life insurance bundle, including life insurance in case of death and income protection insurance. If $225 of that premium relates to your income protection, and $75 is life insurance, then only $225 would be assessable for tax deductions.

If you’re unsure of the breakdown of your bundled insurance policy, check with your insurance broker, financial advisor or product disclosure statements. Alternatively, contact us at Carbon.

Need more help?

Many people are surprised that their income protection insurance premiums may be eligible for a tax deduction. However, eligible tax deductions depend on the type of insurance coverage and whether payments are made inside or outside your super fund.

If you have questions about whether you can claim a tax deduction on your life insurance premiums, speak to us at Carbon. Our friendly professional accountants and financial advisers specialise in making complex tax and personal insurance options easy to understand.

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