Understanding how life insurance may affect your tax return
As tax time approaches, it's natural to wonder how your life insurance might factor into your return. For example, can you claim your premiums as a tax deduction? Or, if you received a claim payout, do you have to pay tax on it?
To help you prepare for the end of the financial year, we've covered some common questions about life insurance and tax.
Everyone's circumstances are different, so if you're unsure or need help, it's best to speak to your financial adviser or registered tax agent for advice.
What information do I need for my tax return?
Details of your insurance policy, the premiums you've paid, and any benefits you've received, are essential for your tax return. Therefore, to make life easier for yourself when preparing your tax return, keep all documents relating to your life insurance policies handy, including annual notices and payout information.
Insurance companies usually send out a statement to members after 30 June each year outlining the premium amounts that can be claimed as tax deductions.
Are life insurance premiums tax deductible?
The short answer is that it depends - some premiums are tax deductible, others aren't.
- Generally not deductible: Premiums for Life Cover, Total and Permanent Disability (TPD), and Critical Illness (Trauma) cover. That is, covers that pay a one-off, lump sum benefit, where the premiums are paid from after-tax money.
- Possibly deductible: If your insurance is held inside your super and you make personal contributions (e.g. via credit card or BPAY), you may be able to claim a deduction. You'll need to submit a Notice of Intent form to your superannuation fund and receive an acknowledgement before lodging your tax return. Note than any amount paid this way counts towards your annual Concessional Contributions Cap.
- Usually deductible: Premiums for Income Protection (IP) or Business Expenses insurance, as they relate to income replacement where the premium is paid from after-tax money.
What if my SMSF pays my premiums?
If your self-managed super fund (SMSF) holds your insurance, you won't be able to claim premiums paid by your fund as a personal tax deduction. However, the SMSF trustee may be able to claim some (or all) of the insurance premiums it paid during the financial year when lodging the SMSF Annual Return. In general, an SMSF has no greater tax benefit in relation to insurance premiums than an ordinary super fund.
Do I have to pay tax on insurance payouts?
The tax you pay on insurance payouts depends on the type of cover you have and if it's held inside super.
- Generally tax-free: Payouts from Life Cover, TPD, or Critical Illness cover held outside super.
- May be taxable: If held inside super, tax treatment depends on factors like who receives the benefit and how it's paid.
- Usually taxable: Income Protection and Business Expenses payouts, as they replace income.
Because tax rules around insurance benefits can be complex, it's best to speak with a tax professional if you're unsure.