Is My Life Cover Policy Tax Deductible?
Life Insurance in Australia is available as both a standalone retail policy or through a superannuation fund. Lets consider how tax treatment differs for these two forms of cover;
|Life Insurance Premiums Outside of Superannuation||Premiums payments are not tax deductible.|
|Life Insurance Benefit Payments Outside of Superannuation||Benefit payments are generally tax deductible.|
|Life Insurance Premiums Funded Through Superannuation||Premium payments are typically fully tax deductible.|
|Life Insurance Through Superannuation Benefit Payments||Benefit payments can attract tax as high as 35% if they are paid to non-dependents|
Conditions of Super Fund Life Cover Tax Deduction
If you place your life insurance cover in with your superannuation fund package of insurances it can be arranged to have the premiums liable to attract tax concessions, that is if you are self employed, or only a small part of your income is derived from this source. You can also deduct the cost of life insurance premiums from your earnings if the life insured is that of your spouse who doesn't earn a lot of money in his or her own right.
The general rule stands in most cases that life insurance premiums, outside of superannuation, are not usually tax deductible but the benefit paid when a successful claim is made on the policy is tax free.
In order to benefit from tax deductibility of the cost of life insurance held within your superannuation fund the premiums have to be paid by the fund through, what is known as a concessional contributions. This simply means it has to be a pre-tax contribution. If your annual contribution exceeds the contribution cap in any 12 month period ($25,000 in 2012/13) you could be found liable to pay an excess contribution tax. For this reason you should make yourself aware of how much you're allowed to contribute to your superannuation so that all the rules governing your fund are complied with.
Although you should go to an experienced financial or taxation adviser to obtain qualified information on your life insurance tax deductibility in your individual situation, in most cases you are generally unable to claim any deductions off your taxation liabilities for any life insurance premiums you had paid in the previous financial year. The same applies to premiums paid for critical care insurance or trauma insurance, in fact any total and personal disablement type of insurance. On the other hand premiums paid for income protection policies are fully claimable and the benefits are taxable as part of your normal taxable income.
Taxation can be an extremely complex field to navigate and for this reason it is always best to get advice from the professionals who study taxation matters thoroughly. However, while you may not be able to claim back any money for any premiums paid, the amounts paid as benefits when you claim on your insurance policies are not treated as taxable income either so all of the money goes towards your care, your household bills or your family’s financial well being.
How is Life Insurance Taken Out By Businesses Taxed?
It can be a different situation with business however, because life insurance tax deductibility is allowed for businesses to cover the cost of premiums paid for insurance taken out on the lives of key personnel. This is allowed in order to protect the company from any loss of revenue should that key person happen to die. The income to the company in these circumstances would be treated as earnings and taxed as such. If, on the other hand, the life insurance was taken out for the purposes of buying out the deceased share of the business, the premiums previously paid would not have been tax deductible and there would be no impost payable on the insurance pay out, although the business may be liable to pay Goods and Services Tax (GST) on the amount raised in this way.
Tax Deductibility of Life Insurance Inside Superannuation
There is a growing trend among people buying term life insurance to do so within their superannuation fund. It appears one of the main reasons for doing this is the affordability of large amounts of cover that are able to be purchased by fund managers at wholesale rates.
When purchasing life insurance through your superannuation fund you can also have the total premium cost paid from the fund savings as non-concessional contributions therefore attracting taxation deductibility, or in the case of employees under a salary sacrifice arrangement. If you require an additional coverage, buying extra life insurance through the fund via a salary sacrifice agreement with your employer will be highly recommended. Self employed people can get the same tax deductible result via their concessional contributions. In short, you will not have to pay any tax on the premiums paid for the life insurance under these circumstances, as long as you are inside the concessional contribution cap and the benefits paid from superannuation funds will be taxable.
It's also possible to take advantage of government concessions when you place your life insurance inside your superannuation fund such as the federal government co-contributions for spouse and low income worker contributions. These types of incentives are not available if you take out your term life insurance outside of your superannuation fund. Concessional contributions within your superannuation fund include:
- Contributions provided by friends
- Personal before tax contributions if you are self employed
- Contributions regarded as being a 'salary sacrifice'
- Additional contributions made by your employer
- Superannuation guarantee contributions
These contribution to your superannuation fund are treated as being part of the fund's assessable income and therefore become a taxable component within the fund generally.
On the other hand non-concessional contributions are contributions that are not included as part of the fund's assessable income and therefore constitute a tax free component. These include:
- Proceeds from any small business sale
- Transfer of an overseas pension within six months of taking up residency in Australia
- Spouse contributions
- Personal contributions that you don't claim a tax deduction on
- Government co-contributions
- Any excess concessional contributions
Your personal contributions into your fund are only tax deductible under the following conditions:
- If you were under the age of 18 and earned your income from carrying on a business or from employment.
- If the contribution is less than 10 percent of your assessable income, including fringe benefits for the one income year.
- The superannuation fund must be a complying fund under the law.
It does follow that if the benefits are taxable the premiums paid for the cover will be tax deductible whereas if the benefits are tax free the premiums will not be tax deductible. It can be complicated and it can not be stressed enough that in these cases you must seek out the advice of an expert in taxation matters to lead you in the right direction because your taxes are not something you want to get wrong, and end up having to pay money back to the ATO.
The rule governing these matters can be roughly interpreted as such; life insurance premiums are in effect capital outlays and not taken as being an expense that has come about in earning an income from a business undertaking. Therefore life insurance tax deductibility can not be allowed under the rules governing the general limitation on payments in the nature of capital outlays.
Life insurance tax deductibility is allowed when the following circumstances apply:
- When all or part of the premium has been collaterally assigned to a lending organisation, such as occurs when a mortgage is taken out and the lender requires such security.
- If the life insurance proceeds are to be received by a charity. In these cases the person paying the premiums is entitled to tax credits that are non-refundable.
- When the life insurance policy has been properly registered as a retirement savings plan, or superannuation fund plan. In this case part of the premium will attract life insurance tax deductibility.
- When you are covered by group insurance the premium amount paid by your employer is tax deductible.
Professional Advice Can Provide Great Assistance in Understanding Life Cover Taxation
As you can see, life insurance tax deductibility is a complex and complicated affair best left to the experts, but whether you can obtain tax relief or not the importance of life insurance is such that the issue of tax deductibility should not be your main consideration. However, knowing that there are possibilities for tax rebates gives you the right questions to ask to ensure you receive everything you are entitled to.
Life insurance needs should be based around the financial protection of your family, or satisfying your debtors, not based on whether you can save a little on your taxable income or not. The risk of your family losing everything you have worked so hard to give them should be why you take out life insurance, not because it helps to cut back on what you have to pay the tax man. Taxation policy changes from time to time depending on whether a government sees any need to stimulate usage or not, as it did to encourage the take up of superannuation to ease pension payouts in the future. Your family insurance needs never change.