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Tax On Life Insurance in 2021

Russell Cain
Russell Cain Updated: 11 January 2021

More and more Australians are turning to life insurance to provide their loved ones with financial security should they pass away, or leave them with an inheritance.

If you have life cover, help your family understand how taxes might impact the death benefit they’ll receive. Also, if your policy is held inside Super, your fund could claim the life insurance premiums and pass on the savings to you.

If a loved one has passed away and you are their beneficiary, it’s important to know whether you’ll pay taxes on the lump sum payout.

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Is life insurance payout taxable in Australia?

Whether your life insurance payout is taxable in Australia generally depends on your policy ownership structure: Inside or outside of super. For instance, a life insurance benefit paid directly to your spouse or child is generally not subject to taxation when the policy is held outside of superannuation.

However, the tax-free status of your death benefit can be affected when your life insurance is purchased via a superannuation fund and paid out to a financially non-dependent beneficiary.

How are life insurance payouts taxed?

Life insurance and taxes are complicated, which is why it’s best to consult with a qualified professional when planning how you’ll support your family after death.

ComparingExpert and consultants and not tax professionals, please contact your accountant or a tax specialist to provide you with advice regarding your life insurance and taxes.

Tax on life insurance held inside Super

You bought your life insurance through a superannuation fund, so the payout can be taxed if paid to financial non-dependants with a tax rate of 30% or more. However, your payout usually won’t be taxed if your death benefit is paid to a financial dependant beneficiary, for example, your spouse or children under the age of 18.

Taxes on life cover outside Super

Payouts from a personally-held life insurance policy are generally tax-free when paid to your nominated beneficiaries. However, the lump sum benefit is almost always taxed if life insurance is for a key person, for example, the policy is owned by a business and the insured is a director. Please see Keyman Insurance for more information.

Do beneficiaries pay taxes on life insurance?

It depends. Your nominated beneficiaries will generally not pay taxes on a life insurance policy held outside of super but might be liable for taxes if your life cover is held inside of super and paid to a non-dependent. If there are no nominated beneficiaries on your policy, the death benefit is usually paid to your Estate. The payout will then typically be distributed by the Executor of your Estate per your Will.

Your beneficiaries might have to pay taxes if:

The difference between SIS dependant vs tax dependent beneficiaries

SIS dependantTax dependent

A superannuation death benefit can only be paid to a person or entity that is a dependent under the Superannuation Industry (Supervision) Act 1993 (SIS Act 1993).

Where an individual has no dependents under the SIS Act, their superannuation will provide the lump sum to their legal representative, which is usually the Executor of their Will (assuming they have one).

Dependent under the Income Tax Assessment Act 1997 (ITAA 97), which will determine the tax paid, but not the eligibility of the person to receive the benefit.

In other words, although a child of any age is an SIS dependent, only a child under 18 is generally considered a tax dependent. Also, while a former spouse is considered a tax dependent, only a current spouse is an SIS dependent.

Are life insurance premiums tax deductible?

Yes, life insurance premiums can be tax deductible to the super fund, if your policy is owned by and purchased through a superannuation fund. However, if your life insurance policy is privately owned, you can’t claim life insurance premiums on your tax return.

The premiums for a policy that is owned by a superannuation fund are tax-deductible to the fund because Super-owned policies are typically paid with pre-tax dollars.

There is a 15% contributions tax applied on super contributions, including insurance premiums. However, these are typically refunded back in the form of a rebate to members (the life insured) as the fund can claim it as a tax deduction.

Tax treatment of life insurance premiums

Just because premiums are tax deductible in a Superfund, does not mean it’s the best option for you, especially considering your beneficiary might have to pay taxes on your death benefit.

When choosing how you’ll purchase your life insurance, you should carefully consider your requirements and family status.

Please note, this information is general in nature. ComparingExpert and consultants are not tax agents, please seek taxation advice from a registered accountant or a tax specialist.

Frequently asked questions

  • What is the average life insurance policy payout?

    Your life cover payout amount depends on the policy you purchase and the amount of cover you took out. That’s why it’s crucial to read your policy disclosure statement (PDS) and policy schedule to make sure you know what will happen in the event of your death or diagnosis of a terminal illness. That said, the majority of life insurance payouts generally range from $100,000 to $2,000,000.

    Most insurers don’t have a minimum benefit limit. However, maximum benefit amounts are generally restricted to a client’s justifiable need.
  • How is life insurance paid out to beneficiaries?

    Your life insurance policy is paid out to your appointed beneficiary(s) in the form of a lump sum, or in a series of installments. Whom you choose to nominate as a beneficiary to receive this payout is an important consideration, because it can mean the difference between the money going to your family or paying outstanding debts.
  • How do I get tax-free life insurance?

    When your life insurance is paid to your dependents, for example, your spouse or child, the benefit will usually be tax-free. However, the payout might be taxed if your life cover is purchased through a super fund and pays out to a non-dependant, like your business partner or adult child.
  • When to consider a life insurance policy to cover inheritance tax

    In Australia, the once-off fee called ‘inheritance tax’ has been abolished and replaced by a variety of taxes that your beneficiaries may be responsible for. The Capital Gains Tax, for example, is what your beneficiary will pay on the capital gain on the sale of assets.

    Whether they pay any taxes, however, depends on the type of gift received under your Will and how the gift was given. For example, if in your Will you leave property to your spouse, when and how much the property is sold for will determine if your spouse will pay any taxes.

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