Tax On Life Insurance

Published: May 3, 2019

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.

Find a life insurance policy outside of super

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:

  • 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.

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

  • 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.

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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30 Comments

  • dawn |

    Hi. I cancelled my life insurance policy, so I could use the 2 1/2 grand towards my home deposit. Do I need to pay tax on this?

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Dawn.
      You do not have to pay tax on a cancelled life insurance policy and you will no longer be able to claim a payout.

  • karyn |

    What is the tax rate on a life insurance payout when the deceased did not nominate a beneficiary?

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Karyn,
      When no beneficiary has been nominated on a life insurance policy, the benefit amount will usually go to your estate and be paid according to your will.

      The tax treatment of death benefits paid to the estate depends on if the policy was held inside super and whether the beneficiaries named in your will is financially dependent on you if so the lump sum is generally tax-free. If beneficiaries are not financial dependents, the tax rate can be up to 35%.

      If the life insurance policy is not held inside super and the policy was a personal policy and the policy owner was the life insured (for example) then generally the benefits can be paid to anyone and the benefit payment is generally tax free.

      When your will does not mention how the money must be spent, the benefit payment will typically pass to your residual estate, meaning the people identified in your will shall typically receive what’s left after all other debts have been paid.

  • Tarsh |

    Hi there. My daughter passed away in May last year. She had no dependants or partner. Me, her mum, and dad each received half of the payout from her Super, which was taxed.

    My question is, do I need to include the payout on my tax return? Also, her dad did not earn any income for the financial year, does he need to do a tax return?

    • SPECIALIST
      Anneke Van Aswegen |

      Hello Tarsh.
      My condolences to you and your husband on the loss of your daughter.

      I wish I were able to help but this is a very specific taxation question and as we are not professional tax advisors, I would recommend you seek assistance from your accountant or tax consultant.

      All the best.

  • Peter Alan Hudson |

    My wife and I are pensioners. I am retired aged 71 and my wife is 69 years old. Our son died on April 6th. 2018 aged 39.

    He had superannuation with Host Plus amounting to $28,000 and a life insurance policy as part of his super with a value of $232,000.

    I was his nominated beneficiary. The payout was taxed at a rate of 25%, so we received an amount of around $197,000 a loss of $63,000.

    I gave them my tax file number prior to payout and I would like to know if the tax % is correct and can I apply to have it reduced. The tax rate on his super is 15%.

    • SPECIALIST
      Anneke Van Aswegen |

      Hello Peter,
      I’m so sorry for your loss. Generally, benefit payments on life insurance policies held inside super are taxed at a rate of up to 16.5% when paid to non-financial dependents, like yourself. I am unaware of whether or not you can reduce this tax rate.

      Because we are not tax professionals, I suggest you request the assistance of an accountant or tax consultant to help you with this query.

      Best of luck.

  • David |

    Hi, my wife and I are Australian citizens currently living abroad. I have a life insurance policy with an Australian company that has a terminal illness clause. If I were to apply for the funds via this clause would the funds be tax free. Thanks

    • SPECIALIST
      Anneke Van Aswegen |

      Hello David.
      Generally, a life insurance company will pay your benefit when you’re diagnosed with a terminal illness from which you are not expected to live for more than 12 or 24 months, depending on the insurer. A medical specialist will usually need to confirm the diagnosis and your insurer must be in agreement of said diagnosis. Please read our article about lodging an insurance claim.

      If your life insurance policy is held outside superannuation, the lump sum payout will usually be tax-free.

  • Kieran Cassidy |

    Hope you can help. I have a life insurance policy which I no longer require because I have other sources of money which will benefit my wife or dependants upon my death.

    Therefore I want to cash it in for its surrender value. If I do this, what percentage of the payout figure am I likely to lose in tax?

    • SPECIALIST
      Anneke Van Aswegen |

      Hello Kieran,
      ComparingExpert and consultants are not registered tax professionals. Please consult your accountant or a tax specialist to ensure you receive the correct information. Take note; in Australia, whole life insurance policies which generally have an investment component has not been available since 1991. Thus if you have a term life insurance policy with an Australian company, there is no investment component with a surrender or cash value.

  • hal |

    If I cash-out a policy, is it taxed?

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Hal,

      Please consult a tax professional or your accountant as ComparingExpert are not registered tax specialists. I’m not sure when you purchased your policy, but in Australia, only term life insurance policies are available, for which there is no surrender value. Meaning, you can’t cash-out a term life insurance policy.

  • Danny |

    Hi
    My mom got citizenship last year.

    She nominated me as her beneficiary to receive her life insurance should she passway. But we’re not sure whether the money will get paid to me, as I am not an Australian citizen or permanent resident of Australia. I am a citizen of another country.

    Thanks for your help

    • SPECIALIST
      Anneke Van Aswegen |

      Hello Danny,
      Generally, if you’re nominated as your mother’s beneficiary, the lump sum should be paid to you regardless of whether you’re an Australian citizen or not. However, it’s always best to contact the insurer directly and confirm this.

  • Scott Curtis |

    I’m being paid out insurance from a policy I took out in 1992. The policy was paid by contributions to super. Payment is 100k. $11000 in super and $89000 in insurance. I’ve been paid $600000 insurance and $60000 super already and was tax free. Is the latest claim same.
    Cheers Scott

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Scott,
      It would be best for you to check with your accountant or a tax specialist as ComparingExpert and consultants are not tax professionals.
      All the best.

  • David Kentwell |

    My wife & I received $70 000 life insurance plus $13 000 superannuation after our 23 year old daughter passed away. How much tax will have to be paid?

    • SPECIALIST
      Anneke Van Aswegen |

      Hi David. My condolences to you and your wife.

      ComparingExpert and consultants are not tax specialists. It’s best to seek to advise from your accountant or a tax professional regarding your question.

      Best of luck.

  • Michael Greene |

    Hi, my father passed away last year and he had a life insurance policy as part of a super fund. I’ve been advised some money will be transferred to me by the executor and I will then need to pay tax on it (as a non financially dependent child). The above states it can be taxed at a rate of up to 35%. Can you advise how this is determined or what conditions affect the rate at which it will be taxed?

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Michael.

      ComparingExpert and consultants are not tax professionals. You might want to seek guidance from a registered accountant or tax specialist regarding your query.

  • Jojo |

    Hi, I have a life insurance and Income Protection from my previous company (insurance company), which is why I cancelled my Super insurance. I am paying for my premiums via post-tax income.

    I read somewhere though that I can actually pay my non-super life insurance premium using my super fund, via ‘roll-over’. Is this correct? Is it advantageous or is there something I am not seeing here?

    Thanks much.

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Jojo.

      A rollover means transferring money from one super fund to another super fund. You can generally do a full rollover (transferring all the money from one super fund to another fund, thus closing down the first fund) or a partial rollover (only transferring some of the money from one fund to another) to pay for your insurance.

      However, you can’t pay life insurance held outside of superannuation using your super fund. However, when taking out life insurance through superannuation, premiums are paid from your super fund, however, there are pros and cons to purchasing insurance through your super.

  • Nathan |

    Hello I have a Whole of life insurance policy with a cash value of 11000 I am considering cancelling the policy and taking the cash, do I have to pay tax on that cash value. The policy is around 40 years old

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Nathan.

      Please contact your accountant or a tax professional for assistance on this very important query. ComparingExpert and consultants provide general information only and are not tax specialists.

  • Steve |

    My wife died 4 months ago. As the spouse and executor, I have just discovered she has super with Sunsuper and due to her account having been inactive they cancelled her insurance in July, 3 months after her death. Will the insurance still be valid if the claim is put in now?I have contacted them but still waiting for a reply/call back
    Cheers

    • SPECIALIST
      Anneke Van Aswegen |

      Hello Steve. I’m sorry to hear of your loss.

      Because we are not Sunsuper consultants, I can’t provide you with an answer. However, on the Sunsuper website, select Insurance in the top navigation, click on ‘How to make a claim’ and follow the instructions. This might provide some clarity.

      Best of luck.

  • Cristina |

    Hi. I have life insurance within my super and have been told by them today that if a binding nomination is made to pay it to my estate (on my death), there will be no tax paid by the super fund on the payout at the time of claim. I am self employed and have made all super contributions as such.

    As I understand, there should be tax paid by the super fund (up to 32% I believe) on the release of the life insurance payout to an estate (same as paying out to to non-dependant children). Is this correct?

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Cristina.

      Yes, generally if your nominated beneficiaries are not tax-dependents, for example, your estate, there might be a tax of up to 31.5% on the death benefit. This percentage generally changes yearly.