October 31 is the tax return deadline - these are the rules on claiming your life insurance premium

With the October 31 tax deadline looming, anyone who hasn’t put in their return yet might be dragging their feet as they look for extra expenses to claim. But if you’re thinking about putting your life insurance premiums down as deductions, think again.

According to Director of Tax Communications at H&R Block, Mark Chapman, “Life insurance is a broad description that potentially covers many different types of insurance policy and, confusingly, the tax treatment for each policy type is not the same, so it’s essential to get advice from your tax agent in order to understand what types of premiums can be claimed and which can’t.”

Are life insurance premiums tax deductible?

The short answer is no, life insurance is considered a personal expense, not related to your income or work, so life insurance payments generally aren’t tax deductible.

Liz Russell, Senior Tax Agent at Etax.com.au, said, “The ATO sees it as capital in nature protecting your whole life as opposed to just the income producing part of your life.”

So if you buy your life insurance directly from an insurer, then your premium isn’t tax deductible. However, Russell said there is one exception to this rule: life insurance cover through your super, which is bought with pre-tax income. What does that mean?

Well, Russell explained that, “If you salary sacrifice part of your salary (pre-tax) into your superannuation fund, it’s called a concessional contribution.”

“If your insurer then uses this pre-tax income to pay for your life insurance premium, they are eligible to claim a deduction on the premium payments which they will then pass onto you.”

But before you get excited, that doesn’t mean you’ll be getting cash back from your insurer at tax time, and you still shouldn’t include these life insurance premiums on your tax return.

Instead, Russell explained, “it’s “tax deductible” in the sense that you won’t have to pay tax on the income you use to buy the policy.”

Is a life insurance payout taxable?

If you’ve received a payout from a life insurance policy this tax year, you might be wondering if you’ll be taxed on that money - does it count as income?

According to Russell, whether or not you pay tax on a life insurance payout depends on whether or not you, the beneficiary of the policy, are considered a dependant. A dependant is usually either a spouse, under 18 years of age or listed as financially dependent on the life insurance policyholder.

If you meet one of those criteria, then your life insurance payout likely won’t be taxed. On the other hand, Russell said, “If the beneficiary of the policy does not meet one of those criteria, the payout may be taxed as high as 35%.”

Is any of my insurance tax deductible?

We’re glad you asked, because actually, yes. If you’ve got income protection insurance and pay for it out of your own pocket - not through superannuation - that’s usually tax deductible.

“If you take out an Income Protection insurance policy, the premiums will generally be tax deductible because if you have to make a claim, the payout you get will replace your taxable income,” Chapman said.

Having said that, still proceed with caution, particularly if you have income protection and trauma insurance with the same provider. In this case, only the portion of your premium that covers the income protection cover can be claimed.

If that sounds way too complicated, don’t worry, Russell said you “should be able to get an annual statement from your Income Protection fund to ensure you claim the correct amount on your return.”

Oh, and the answer to your next question is yes, you do pay tax on a pay out from your income protection insurance and you should include it as income on your tax return.

“In this event, the insurance provider should issue a PAYG summary for inclusion as income the same way that any employer does at the end of each financial year,” Russell said.

Chapman listed Total and Permanent Disability Insurance and Trauma Insurance as other types of insurance where a deduction can’t be claimed.

Income protection insurance through super - is it tax deductible?

If you do have income protection insurance through your super, then you’re out of luck as far as a tax deduction goes.

“In the case of Income Protection paid in your Super, even though you might think that you “paid” for the policy, the ATO doesn’t agree. They say that the Superfund pays for the policy on your behalf and as it’s been paid for on your behalf rather than directly by you, it’s not claimable,” Russell said.

While these are general rules for claiming life insurance on your tax returns, if you’re unsure, it’s always better to check with an expert - the ATO or an accounting service will be able to give you the best advice on what you can claim, given your circumstances.

And if you’re in the market for a life insurance policy or looking to switch insurers, don’t forget to check out our life insurance hub before going ahead.