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Is Life Insurance Tax Deductible?
Is Life Insurance Tax Deductible?
Written by
Hannah Lovegrove
Edited by
Ellie Garran
Reviewed by
Adrian BennettEasily compare life insurance quotes
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Long story short
There are four main types of life insurance
Term life, trauma, total and permanent disability, and income protection each provide unique benefits for life’s unexpected events.
Tax deductions on life insurance premiums are limited
Income protection premiums paid for outside superannuation can be tax deductible, but most other life insurance premiums generally aren’t.
Life insurance payouts may or may not be taxable
It depends on the cover type, where the policy is held, and who receives the benefit.
Are life insurance premiums tax deductible?
How and when tax comes into play for your life insurance premiums depends on the cover you have and how you hold it. While some premiums are tax deductible, not all are. The same goes for payouts, too. Wrapping your head around these rules could make it easier to make informed decisions on your cover and your finances.
There are four types of life insurance cover:
- Term life insurance – also referred to as life cover, death cover, or life insurance. It pays a lump sum to your nominated beneficiaries or estate in the event you pass away. If you are diagnosed with a terminal illness with a predefined life expectancy, a lump sum might also be paid out.
- Trauma insurance – also referred to as critical illness cover or recovery insurance. Trauma cover provides protection for specified illnesses like cancer, strokes, and heart attacks meeting severity criteria (as defined by the insurance policy). If you’re unfortunate enough to experience one of these conditions, trauma cover may pay a lump sum to help with your medical expenses, ongoing recovery, and rehabilitation costs.
- Total and permanent disability (TPD) insurance – TPD pays a lump sum if you become permanently unable to work due to a serious injury or illness, helping cover ongoing living expenses and lifestyle adjustments.
- Income protection insurance – Income protection insurance provides regular monthly payments (typically up to 70% of your income) if you’re unable to work due to injury or illness. Payments begin after a waiting period and continue for a specified benefit period.
You can take out most life insurance policies, like TPD, term life, and income protection insurance, through your superannuation or from an external insurance provider but trauma insurance can only be purchased outside of super. The tax implications with life insurance premiums differ depending on which option you choose. Here’s how.
Life insurance through superannuation
Super funds may offer term life cover, TPD insurance, and/or income protection. Trauma insurance, however, cannot be taken out through super.
If your life insurance is through your super, your premiums can be paid from your account balance, using those pre-tax funds.
For most life insurance policies paid through superannuation, premiums typically aren’t personally tax deductible. You’re already getting that tax benefit by using those pre-tax dollars from your super account. No one likes a double-dipper.
There’s one exception (sort of): income protection insurance. The super fund trustee might be able to claim tax deductions on income protection premiums paid through your super.
Life insurance through a self-managed super fund (SMSF)
If your life insurance is purchased through an SMSF, you won’t be able to claim the premiums as a personal deduction. However, the SMSF trustee (which could be you or someone else) may be able to claim a deduction. This would be for income protection premiums only; other types of life insurance premiums aren’t handled this way.
Life insurance outside of superannuation
Typically, premiums for term life cover, TPD, and trauma insurance policies held outside of super are not tax deductible.
You can, however, claim tax deductions on premiums for income protection insurance separate from your super. That means if you’re purchasing income protection outside of your super fund, you can include the full premium as a personal tax deduction. Your marginal tax rate will determine your potential tax saving.
Helpful tip
When it comes to life insurance, your tax obligations can get complicated. They can also vary depending on your particular circumstances. That makes it a good idea to chat with a qualified tax professional or financial adviser. They can help you understand your specific tax deal, based on your own situation.
Adrian Bennett
General Manager for General Insurance
Are life insurance payouts taxable?
On the flip side, it’s also important to be aware of the potential tax implications that come with your life insurance payouts. Life insurance payouts can be taxable or non-taxable depending on the type of cover, where the policy was held, and who receives the payout.
Life insurance payouts outside of superannuation
- Payouts from term life insurance, TPD insurance, and trauma cover held outside of your super typically aren’t taxable. This means that you or your beneficiaries won’t have to declare them or pay tax on the payout usually. However, it’s always best to check with your tax agent for further information on this.
- Income protection payouts are taxable and you’ll need to declare these payments in your tax return. After all, they’re treated like your regular employment income.
Life insurance payouts through superannuation
- Term life insurance payouts through your super are sometimes taxable. It depends on your relationship with the beneficiary (e.g. are they are your spouse or child under 18?) and how the benefit is paid (e.g. as a lump sum or income stream).
- TPD insurance payouts are sometimes taxable. It depends on your age, how the benefit is paid, and whether you withdraw it from your super or leave it there.
- Income protection payouts are taxable because they’re counted as part of your income.
How is life insurance taxed?
| Insurance type | Are premiums tax deductible? | Is payout taxable? | |
| Through super | Term life insurance | No | Sometimes |
| Income protection insurance | No | Yes | |
| TPD insurance | No | Sometimes | |
| Outside super | Term life insurance | No | No |
| Income protection insurance | Yes | Yes | |
| TPD insurance | No | No | |
| Trauma insurance | No | No | |
Note: Information is general only and refers to the policy holder/superannuation member (not the super fund trustee) only. Please consider the appropriateness of this information to your personal circumstances and seek taxation advice from an authorised tax agent.
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