Life insurance is something you should consider when it comes to protecting you and your family. It gives you peace of mind knowing your family will be looked after if something happens to you. Putting together a solid life insurance plan requires a basic understanding of the tax implications for different life insurances. It’s important to find what’s right for you in terms of financial protection and tax impact.


Types of life insurances


There are 4 types of life insurances:

  • Death cover (otherwise known as life cover or term life insurance) – provides the beneficiary with a payout if the insured passes away.
  • Total and permanent disability (TPD) cover – provides a payout if the insured becomes permanently disabled.
  • Trauma cover – insures against serious illness or injury.
  • Income protection – the insured is paid a monthly benefit during the time which they are unable to work due to illness or injury.


Can I claim a tax deduction for my life insurance premiums?


Not all life insurance premiums are tax deductible. Where you hold your insurance policy will determine if deductions are allowed. If your life policy is held inside your super fund, the premiums are generally tax deductible because you’re paying with pre-tax income. Your super fund claims the deduction which is then passed onto you.

For death cover and TPD policies of a personal nature that are held outside of super, the premiums are not tax deductible. However, income protection is fully tax deductible regardless of where it’s held.

Premiums for trauma cover are not tax deductible. This type of insurance is not held inside super funds because access to proceeds is restricted.


Should I hold life insurance in my super fund?


Being able to claim tax deductions doesn’t always mean it’s the best option for your situation. You should also consider other factors such as:

  • Convenience (if a default cover is available).
  • Cost and affordability.
  • Your marginal tax rate.
  • Estate planning.
  • Your retirement needs.

For some individuals, it can be beneficial to hold insurances inside super. If available, choosing the default insurance option means less hassle and paperwork. The cost is reduced because you’re paying with pre-tax income. You may also pay less if super funds have access to discounted prices from purchasing policies in bulk. Your cashflow is not affected since you don’t need to make payments using your personal savings. However, it’s best to speak to a financial advisor regarding the suitability of the default cover inside super. According to the Underinsurance in Australia 2015 report from Rice Warner, you risk being underinsured as your family composition changes.

If you’re a high income earner, consider taking out income protection outside of super. You’ll get a greater tax benefit if your marginal tax rate is over the 15% tax rate for super.

The assets in your super account aren’t covered by your will. Keep in mind that if your policy is held inside super, your insurance proceeds will be paid into super. So unless you’ve provided a valid binding beneficiary nomination to your super fund, the fund trustee also has a say over who gets your benefit.

Paying your insurances with super can reduce the amount of money you’ll have for retirement. This can have a negative impact on your lifestyle in later years. You may need to consider increasing your super contributions to cover the cost of your insurance premiums.


Are insurance payouts taxable?


The tax treatment of payouts will depend on the following:

  1. Who receives the proceeds – is it a dependent or non-dependent of the insured?
  2. Is the payout taken as a lump sum or pension?


Payouts made to dependent beneficiaries are generally not taxed. This includes:

  • Spouse.
  • Children under 18 years old.
  • A person who was financially dependent on the insured.

For non-dependent beneficiaries, payouts are generally subject to tax. As for income protection, the benefits received are taxable.

A comprehensive life insurance strategy requires careful planning because getting it wrong can be financially and emotionally costly. Contact Moiler for more information on how life insurances impact your tax, retirement, and estate planning before committing or making changes to your policies.


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This document has been prepared by Moiler Wealth, an Authorised Representative of Count Financial Limited ABN 19 001 974 625; AFSL 227232 (“Count”) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 and is for general information only. The presentation has been prepared without taking into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for your needs and consider talking to a Count Authorised Representative before making any investment decision. The relevant PDS should be considered before making a decision about any financial product. The information is provided as an information service only and does not constitute financial product advice and should not be relied upon as financial product advice. 23 December 2019.