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 depends on the type of cover.

Income protection as a tax deduction

Generally income protection insurance premiums paid under individual policies may be claimed as a tax deduction to the extent that the premium is for benefits that are designed to replace income. 

In the case where your income protection insurance is structured through your superannuation fund, you can make contributions to your fund (e.g. employer or personal contributions), which are then used to pay for the premiums. The personal contributions to your fund may be claimed as a tax deduction in your tax return. Your fund could claim a deduction in respect of the premiums, which is then reflected in your annual superannuation statement.

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Tax deductions on other types of life insurance

The premiums for any standalone life insurance policy that compensates you for death or critical injury such as life insurance, TPD and recovery (trauma) insurance may not be claimed as a tax deduction.

In the instance where life cover and TPD are  taken through your superannuation fund, similar to the income protection policy through superannuation fund, the personal contributions you make to pay the premium may be deductible to you and the fund could treat the insurance premiums as a deductible expense.

Tax liabilities on insurance claims

In the event that you claim on your income protection policy, any income replacement benefits received are generally assessable as income and liable to 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, excluding recovery (trauma), is held through a superannuation fund, the tax treatment of the insurance benefits will depend on a number of factors, including the type of insurance claim, and your or your beneficiary’s age at the time of claim. 

Why you should always speak to a professional 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 always seek professional advice from your accountant or tax adviser.

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