Is Life Insurance Tax Deductible in Super?
Firstly, let’s address what we define life insurance to be, so that we are on the same page in regards to its tax deductible status. On that note, we should also cover off on what we are proposing to claim a tax deduction on.
There are 3 main types of personal life insurances that people own within superannuation. This includes death cover (sometimes contradictorily referred to as life cover), total and permanent disability (TPD) cover and Income Protection cover (aka salary continuance). For the purposes of this article, we will collectively refer to these as life insurances.
When we discuss tax deductibility status, we are referring to the ability to claim a tax deduction for the premiums payable for each type of insurance cover. However, this tax deduction is a tax deduction received within your superannuation account, based on superannuation tax rates. This is not a tax deduction that you are able to claim for your Individual Tax Return (ITR) purposes or for any other entity.
What is an insurance premium?
A premium is an amount payable, usually on an annual or monthly basis, to the insurance provider in exchange for the promise of receiving insurance benefits should you suffer an insurable event, as defined by the insurance policy in place.
Hopefully this now provides a basis as we determine ‘is life insurance tax deductible in super?’
Is Death Insurance Tax Deductible in Super?
Death cover generally provides the owner/beneficiary of a death insurance policy with a lump sum upon the death of the insured. Most commonly, this will be a lump sum paid to a husband or wife in the event their spouse was to pass away.
This lump sum would generally be used to cover funeral expenses, eliminate debt (e.g. mortgage, credit cards, etc.), cover children’s education and/or used to provide a continued income stream for the surviving spouse.
| Insurance Type | Premiums Deductible | Conditions |
|---|---|---|
| Death Insurance | Yes | n/a |
In most circumstance, the premiums payable for Death Cover will be tax deductible within your superannuation account. However, all tax matters should always be discussed with your accountant or tax adviser.
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Is Death Insurance tax deductible if I own the policy in my own name?
Generally, no.
Is TPD Insurance Tax Deductible in Super?
Total and Permanent Disability (TPD) Insurance generally provides a lump sum to the insured when they suffer a TPD event, as defined by the insurance policy.
This lump sum is typically used to cover hospital bills, make modifications to the home/car/office or reduce debt levels.
| Insurance Type | Premiums Deductible? | Conditions |
|---|---|---|
| TPD Insurance | Yes (conditional) | The part of the premium relating to 'disability superannuation benefits' |
The deductibility of TPD insurance needs a little more explaining. However, I do not want to confuse the matter too much, as each individuals’ circumstances will differ.
Basically, the portion of the premium relating to the ‘core’ benefits of a TPD policy will generally be tax deductible.
The portion of the premium relating to non-core or ancillary benefits (such as ‘extras’) will generally not be tax deductible.
It needs to be determined what portion of the benefits of a TPD policy a trustee would be obligated to provide a disability superannuation benefit to a member and the scope of the insured event.
Refer to Taxation Ruling TR 2012/6 for further information.
Is TPD Insurance tax deductible if I own the policy in my own name?
Generally, no.
Is Income Protection Insurance Tax Deductible in Super?
Income Protection insurance provides a replacement income to the insured after a specific time period for a predetermined time frame, or until the insured is able to return to work. Partial benefits may continue to be received if the insured returns to work part-time. It is unusual for an Income Protection policy to provide a replacement income of greater than 80% of the insured’s pre- illness/disability income, as they encourage and intend the insured to return to work in some capacity.
This replacement income is used to allow the insured to continue covering expenses while they are unable to work.
| Insurance Type | Premiums Deductible? | Conditions |
|---|---|---|
| Income Protection Insurance | Yes | n/a |
Is Income Protection Insurance tax deductible if I own the policy in my own name?
Yes. And this point is important. If the policy is owned within superannuation, the premiums are tax deductible to the superannuation fund and the super tax rate of 15% – assuming that your account is in accumulation phase and that the deduction is effectively rebated into your account.
However, if you were to own the policy in your individual name and your tax rate was greater than 15%, the after-tax cost of Income Protection Insurance would be lower than if the policy was held in superannuation.
The only downside to this is that you would need to fund insurance premiums from your personal bank account rather than from your superannuation member balance.
An alternative would be to make salary sacrifice contributions, or self-employed Concessional Contributions, to cover the cost of the insurance premiums for cover held within super. This way, you would effectively be receiving a tax deduction in your personal name equivalent to the premium cost.
The only reason why this situation would be better than owning the policy in your personal name is that you wouldn’t be under as much stress to cover premium costs from your personal bank account, as you would have your superannuation member balance as back up to pay for the premiums.
In this situation where you are making contributions to cover the cost of premiums, you should be mindful not to exceed the Concessional contribution cap and Non-Concessional contribution cap.
IMPORTANT
You should always refer all tax matters a tax adviser or accountant prior. This article has not discussed your potential inability to access insurance proceeds for policies owned wit
hin super. Nor has it discussed the tax consequences of receiving insurance proceeds from superannuation.
If you would like anything clarified or have any further questions about Is Life Insurance Tax Deductible in Super or any other topics, please do not hesitate to leave a comment in the section below and I will endeavour to respond within 24 hours.
