Tax On Life Insurance
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, discover whether you can claim the life insurance premiums you're paying on your tax return.
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.
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.
Find a life insurance policy outside of super
Your beneficiaries might have to pay taxes if:
- Your policy is inside of Super and your beneficiary(s) are not defined as financially tax dependent according to the Income Tax Assessment Act 1997; this typically includes children over the age of 18.
- The Executor of your Will holds onto the death benefits after your death. Any interest earned during the holding period could also be taxable as part of your beneficiaries’ income.
- A third party or business hold the ownership of your life insurance policy.
The difference between SIS dependant vs tax dependent beneficiaries
|SIS dependant||Tax 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.
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
- Outside superannuation: Life insurance premiums are not tax deductible.
- Inside superannuation: Premiums are usually deductible to your super fund when premiums are paid from your pre-taxed income. Your super fund can claim the refund on your premiums and then pass it on to you.
- Keyman insurance: Premiums are often tax deductible on a Revenue Protection structure, but benefits paid out are taxable. On a Capital Protection structure, premiums are generally not tax deductible, but the benefit paid out can be tax-free.
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.
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NobleOak Direct Life Insurance
Protect your family with Life Insurance and pay on average 20%* less when compared with other insurers. T & Cs apply. Consider the PDS. Issuer is NobleOak Life Limited ABN 85087648708. AFSL 247302.
Frequently asked questions and answers
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.
Get a life insurance policy and leave an inheritance
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.
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The taxation treatment of keyman insurance depends on whether the keyman insurance policy is for a capital or revenue purposes