Claiming Tax Deductions on Insurance Premiums

Life Insurance -

Life insurance is a broad term that covers different types of policies that include life cover, income protection, total & permanent disability (TPD) and recovery insurance  (sometimes known as trauma insurance). When it comes to tax time, claiming a tax deduction on premiums and claims benefits depends on the type of cover, and whether or not it’s paid through your super fund.

Income protection as a tax deduction

Generally you can claim a tax deduction on any premium you pay for insurance against loss of income. As permitted by the Australian Taxation Office, income protection insurance premiums paid under individual policies can be claimed as a tax deduction.
The amount you can claim as a deduction on your income insurance premium is based on your marginal tax rate – which is set based on your annual assessable income.

In the case where your income protection insurance is paid through your superannuation, you cannot claim a deduction. Your fund will claim the deduction on your behalf, which is then reflected in your annual superannuation statement rather than your tax return.

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Tax deductions on other types of life insurance

Any standalone life insurance policy that compensates you for physical injury such as life insurance, TPD and recovery (trauma) insurance cannot be claimed as a tax deduction.
In the instance where a life insurance policy is paid through your superannuation fund, the premiums may be tax deductible and your fund will claim the deduction on your behalf.

Tax liabilities on insurance claims

In the event that you claim on your income protection policy, the benefits you receive will be assessed and liable for tax just like your regular income.
A claim made on other forms of life insurance such life cover, TPD and recovery (trauma) insurance is generally tax-free. Where a policy is held through a superannuation fund, the benefit can be subject to tax if the beneficiaries are not financially dependent.

Why you should always speak to an independent tax adviser

Australian tax law is complex and your treatment will vary depending on your individual circumstances. To make the most informed tax decisions on your circumstances you should seek professional advice from your accountant or tax adviser.

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