How is my insurance taxed?

With the cost of living on the rise, it’s more important than ever to have a financial safety net that protects you and your family in case the unexpected happens.

Most Australian employees have some form of life insurance, often through their superannuation fund, but many of us tend to ‘set and forget’.

To make the most of your life insurance policy, it’s useful to understand how it works, and how premiums and payments are affected by tax.

Various types of life insurance

Life insurance is an umbrella term for a range of policies that cover different situations. They include:

  • Life cover, which pays out after your death to someone you have nominated.

  • Income protection covers you if you’re unable to work because of illness or injury.

  • Total and permanent disability (TPD) insurance provides medical and living costs if you become permanently disabled.

  • Accidental death and injury cover pays a lump sum if you die or are injured.

  • Critical illness or trauma insurance pays a lump sum to cover medical expenses for major medical conditions.

  • Business expenses insurance covers ongoing fixed business costs if you’re a business owner suffering serious illness or injury.

Tax benefits and deductions

The premiums for most types of life insurance are not tax deductible, but there are exceptions. Premiums for income protection held outside of super are tax-deductible and inside super for the self-employed. Business expenses insurance premiums are also tax deductible.

The tax treatment of benefits paid out by policies also varies according to the type of policy and your situation, so it’s important to talk to us. Generally, life cover paid to someone who’s financially dependent on you (typically a spouse and children under 18 years) is not taxed. But if the beneficiary isn’t your financial dependent, they can expect to pay tax.

Income protection insurance payments must be declared on your tax return and will be taxed at your marginal rate, just like your usual salary. Business expense insurance payouts also taxable.

Lump sum payments made through other policies are not taxable.

Inside super or outside?

Some of these insurances, particularly life cover, income protection and TPD, can be purchased through your super fund. Most people have a basic level of cover held this way, but you should check to see if it’s adequate for your needs.

If you are aged under 25, have a super balance of $6,000 or less, or your account is inactive, you will need to “opt in” if you want insurance cover.

If you have a self-managed super fund (SMSF), you’re required to consider whether to hold life insurance for each of the fund’s members, although there’s no obligation to buy.

Super pros and cons

You’ll need to do the sums for your circumstances, which is where an adviser can assist, but there may be an advantage to using your super to pay the premiums. The main reason is cost.

Sometimes, the buying power of larger super funds allows them to negotiate competitive pricing for insurance products.i It’s not always the case, so you’ll need to shop around to make sure you’re getting the best deal.

Another potential financial benefit in paying the monthly premiums out of your super account, is that you’re using funds taxed at 15 per cent. Whereas, if you pay the premium from your own bank account, you’d be using funds already taxed at your marginal tax rate, which may be higher. That means your pre-tax dollars are working harder and you’ve still got your cash in the bank.

The main drawback to paying insurance premiums through super is that you’ll be reducing your super balance, which means less for retirement. However, you could choose to boost your balance using salary sacrifice or personal contributions.

Your safety net checklist

  1. Decide on who and what needs to be financially protected if something should happen to you.

  2. Weigh up the best type of life insurance to meet your needs and shop around.

  3. Be clear about any tax implications of an insurance payout

  4. Make sure the policy benefit is adequate and check it annually.

Deciding on the type of life insurance you need can be tricky, so give us a call on 03 9553 0271 to discuss your insurance needs.

i Insurance through super – Moneysmart.gov.au

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CFP® Dip FP
Authorised Representative 298494
Interprac Financial Planning Pty Ltd 

Darryl Jopling

Senior Adviser

I have worked in the financial services industry since 1982 and as a Financial Adviser since 1999.

I have worked for large Financial Planning businesses, Membership based organisations and looked after the financial planning needs of clients within an Accounting Practice before starting my own business.

I am married, have 4 older children and a grandson and I am keen golfer with mixed results like many .

I have been through many of the strategies I talk with clients about myself and with my family.

I have been through the journey of seeing my parents move into Aged care and negotiated the difficulties and pitfalls of understanding the system for them and this gives me an excellent insight into what is required to assist families at this difficult time.

In a previous roll I used to run retirement seminars looking at Centrelink and Retirement Incomes and how to make these work for you. I have helped many of my clients with Aged Care advice when their parents needed to move into Nursing Homes. For many clients I assist them with superannuation, building wealth and protecting their loved ones with insurance.

I am supported by his, Licensee, Interprac Financial Planning’s in-house resources and ongoing technical, systems and training.

I am committed to understanding your needs and identifying strategies and products to help you achieve your goals.

My guiding principle as an Adviser is to design plans which help to provide my clients with clarity of purpose and the opportunity to build a solid financial foundation.
I will take the time to listen, explain things clearly and keep you informed throughout the advice process.

My experience is complemented by professional qualifications including:

  • Certified Financial PlannerTM Professional
  • Diploma of Financial Planning

At Choice Financial Advice we work with you along the way on life’s journey.

Whether you are getting married, starting a family, embarking on the trip of a lifetime, planning to enjoy your years after work or assisting elderly parents with Aged Care and Nursing Home placements, we can help.