Life & Income Protection Insurance tax deductions explained

Whether you can claim a tax deduction on the premiums you pay for insurance depends on the cover type and whether or not premiums are paid through your super fund.

Life insurance & income protection overview

Life insurance is a term that refers to a wide range of products that are designed to provide you with financial protection in different circumstances. TAL offers a range of flexible cover, including: 

• Life Insurance, which pays a lump sum to your nominated beneficiaries in case of your death or being diagnosed with terminal illness.
• Income Protection Insurance, which pays a monthly benefit worth up to 70% of your income (up to a total value of $30,000) in case you are temporarily unable to work due to illness or injury. 
• Total and Permanent Disability Insurance, offering a lump sum in case you are permanently unable to work due to injury or illness.
• Critical Illness Insurance, also known as trauma insurance, which covers you in case you suffer from a major illness like a heart attack or stroke. 
  
  

Tax deductions on life and income insurance premiums

Each type of life insurance will bring with it tax implications that generally relate to two things – premiums and benefits:

• Premiums – the regular payments you make to maintain your insurance cover. These might be fortnightly, monthly or annual.
• Benefits – the payout you receive if you, or your nominated beneficiary, make an insurance claim.

Generally, life insurance premiums are not eligible for tax deduction. In fact, according to the Australian Tax Office (ATO) the situation is clear cut for most life insurance types:

However, the rules can differ when it comes to income protection insurance, since this type of cover directly relates to your employment income. 

Your financial adviser will be able to confirm whether you are eligible to make these deductions given your specific circumstances. When it comes to reporting your income protection premiums for tax purposes, some insurers will send you a receipt for premiums paid – you will need to report this as part of your tax return. Other insurers will report this information directly to the ATO. Again, your financial adviser will be able to support you with reporting any income protection insurance premiums accurately. 

Tax assessment on life insurance benefits

While income protection insurance premiums can generally be treated as a tax deduction, any money you receive as part of an income protection insurance payout is eligible to be taxed. 

You must report any payouts along with any other income in your annual tax return. It is also a good idea to factor this future tax obligation into your budgeting when you plan how you will spend the income protection insurance payout over your period of unemployment. 

On the other hand, benefits received by individual policy owners from a claim made under other forms of life insurance such as life cover, TPD and critical illness or trauma insurance should generally be tax-free. Again, if you receive a payout under any of these types of insurance, it’s best to check how to report it with your financial adviser.

Tax deductions on life and income protection insurance through super
Many people take out insurance cover through their superannuation fund. Generally, if your insurance is taken out under your super and the premiums are paid via your super contributions, then these premiums are not eligible for a tax deduction. 

The rules can also vary if you have a self-managed super fund, so it is worth checking in with your financial adviser to confirm your individual situation. 

The below table provides general information on the tax status of different life insurance types purchased inside and outside super:

How do tax deductions work for bundled insurance? 

Since there are a number of types of life insurance cover, each one offering protection in different circumstances, some people choose to bundle them into one policy that suits their needs. Often this can be a more cost effective way of securing a broader range of protection, as you pay one set of premiums that has been tailored for your specific level of cover and circumstances. 

You’ll need to understand how your policy is bundled and how the relevant premiums are structured in order to manage any tax deductions. For example, even if your income protection insurance is bundled with other life insurance products, you are only able to claim tax deductions on the portion of your premiums that relate to your income protection cover.

So let’s say you pay premiums of $200/per month for a life insurance bundle that includes life insurance in case of death and income protection insurance. If $125 worth of those premiums relate to your income protection, and $75 relate to life insurance in case of death then only $125 per month would be assessable for tax deductions. If you are not sure how your premiums and policy are structured, check your policy documents or call your insurer for greater clarity. 

If you would like to know more about the different types of life insurance available through TAL, get a quick quote today. 

*This information is general only and does not constitute tax advice. You should obtain professional tax advice that takes into account your circumstances.