Are life insurance premiums tax deductible?

Life insurance can make a real difference to you and your loved ones, should the unthinkable happen. While weighing up potential pros and cons, it’s important to consider the costs involved and if your monthly premiums could be tax deductible.

When we say life insurance, this typically includes four types of insurance, which are life (or death) cover, total and permanent disability (commonly referred to as TPD) cover, trauma (or critical illness) cover and income protection.

We take a look at the advice from the Australian Tax Office (ATO) in relation to life insurance premiums and see whether it’s a cost you can write off, come tax time.

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Is life insurance tax deductible through super?

The premiums on life insurance policies through superannuation are generally not tax deductible, the ATO says. Typically, super funds offer three types of life insurance to their members, namely life (or death) cover, TPD insurance and income protection. Each of these types of cover are paid for through deductions from your pre-tax contributions, which have already received favourable tax treatment. In addition, the ATO has ruled that no premiums paid for a life insurance policy that compensates against personal physical injury can be used as a tax deduction.

It’s worth noting that the situation may be different and potentially more complex if you have a policy within your self-managed super fund (SMSF), but according to the ATO, a deduction may be available to the trustee of a complying super fund for insurance premiums. If your super is set up in this way, it may be worth speaking to a financial advisor or tax accountant for guidance on your situation.

Is life insurance tax deductible outside of super?

If you have a life insurance policy outside of super that covers you for income protection, you may be able to claim the premiums as a tax deduction. This is a key difference between income protection in and outside of a super fund. For life insurance that compensates you against personal injury, such as TPD, trauma and life (or death) cover, the ATO explains that these premiums can’t be included as a tax deductible expense.

Are life insurance benefits taxed in Australia?

If a life insurance benefit is paid out as a lump sum directly to the policyholder or to a spouse or financially-dependent child, it will generally be tax- free, regardless of whether the policy is held inside or outside of super, according to the ATO and several life insurers on Canstar’s database.

If the benefit is paid from a policy held within super to a non-financially dependent beneficiary, either as a lump sum or income stream, the beneficiary may have to pay tax on benefit. This may also be the case if the benefit is paid to a dependent as an income stream. In these situations, the tax treatment of the payout would depend on the specific circumstances involved, so you may wish to seek professional advice in navigating the tax implications.

Likewise, if the payment is to a non-dependent beneficiary from a policy within an SMSF, there may be tax implications, according to life insurer NobleOak. Again, you may want to seek professional advice in this situation.

Benefits paid from an income protection policy will generally incur tax on the monthly payments in the same way your regular income is taxed, and will need to be declared as ‘other income’ on your tax return, according to the ATO.

→ Related story: Estate planning guide: Getting your affairs in order

If you are reviewing your life insurance and potential tax implications, it may be a good idea to seek personal advice from a tax professional to support you in considering your overall life planning needs.

Additional reporting by the Canstar Editorial team.

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