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Australia Life Insurance Tax Guide

Australian life insurance taxation. The guide covers: the life insurance premium deductibility — the 'life insurance premiums' are 'deductible' if the 'insurance is for the 'business purposes' (the 'business life insurance' — the 'key person insurance', the 'shareholder insurance', the 'partnership insurance'); the 'key person insurance' premiums are 'deductible' under the 'Section 8-1 of the ITAA 1997' if the 'insurance is to 'protect the business from the loss of the key person' (the 'essential employee' or the 'director'); the 'shareholder insurance' premiums (the 'buy-sell insurance' for the 'shareholder protection') are 'deductible' if the 'insurance is 'necessary for the business continuity''; the 'personal life insurance premiums' (the 'life insurance for the family protection') are NOT 'deductible' (the 'personal insurance' is the 'capital expense' and is NOT 'deductible'); the tax treatment of the life insurance payouts — the 'life insurance payout' (the 'lump sum death benefit') paid to the 'beneficiary' is 'tax-free' if the 'beneficiary is the 'dependant' (the 'spouse', the 'child under 18', the 'financial dependant'); the 'life insurance payout' paid to the 'non-dependant' (the 'adult child', the 'parent', the 'sibling') is 'taxable' — the 'taxable component' (the 'element of the payout that exceeds the 'cost base' of the 'policy') is 'included in the assessable income' at the 'marginal rate'; the 'life insurance payout' received by the 'company' (the 'key person insurance proceeds') is 'assessable income' for the 'company' (the 'insurance proceeds' are 'included in the company's assessable income' under the 'Section 6-5 of the ITAA 1997' — the 'insurance proceeds are the 'ordinary income''); the 'life insurance payout' received by the 'partnership' or the 'trust' is 'assessable income' for the 'entity'; the life insurance in the superannuation — the 'life insurance held in the superannuation fund' (the 'superannuation life insurance' — the 'death cover' and the 'total and permanent disability (the 'TPD') cover') is 'subject to the concessional tax treatment'; the 'premiums for the life insurance in the super fund' are 'deductible to the super fund' (the 'super fund claims the deduction for the life insurance premiums'); the 'death benefit payout from the super fund' (the 'superannuation death benefit') is 'tax-free' if paid to the 'dependants' (the 'spouse, the children under 18, the financial dependants'); the 'death benefit payout to the non-dependants' is 'taxed at 15% plus the Medicare levy' (the 'taxable component — the element taxed') or the '30% plus the Medicare levy' (the 'taxable component — the element untaxed'); the total and permanent disability (the 'TPD') insurance — the 'TPD insurance' (the 'total and permanent disability insurance') premiums are 'deductible' if the 'TPD insurance is for the 'business purposes' (the 'key person TPD insurance') or the 'TPD insurance in the super fund' (the 'super fund claims the deduction for the TPD premium'); the 'TPD payout' from the 'super fund' is 'tax-free' if the 'member satisfies the 'TPD condition of release'' and the 'payout is the 'superannuation benefit'' — the 'TPD payout' from the 'personal TPD insurance' (the 'outside super fund') is 'tax-free' if the 'policy was 'not claimed as the deduction'' for the 'self-employed' or the 'employed'.

Premium Deductibility

  • Business life insurance — deductible: The 'key person insurance' and the 'shareholder insurance' premiums are 'deductible'.
  • Personal life insurance — NOT deductible: The 'personal life insurance premiums' are 'NOT deductible'.
  • Super life insurance: The 'super fund' claims the 'deduction for the life insurance premiums' in the 'super fund'.

For the business expenses and the business deductions, see our Business Expenses Guide →.

Payout Tax Treatment

  • Tax-free to dependants: The 'life insurance payout' to the 'spouse' or the 'child under 18' is 'tax-free'.
  • Taxable to non-dependants: The 'payout to the adult child' is 'taxed at the marginal rate'.
  • Key person payout: The 'key person insurance proceeds' are 'assessable income' for the 'company'.

For the estate planning and the inheritance tax rules, see our Inheritance & Estate Tax Guide →.

Super & TPD Insurance

  • Super death benefit: The 'death benefit from the super fund' is 'tax-free to the dependants'.
  • TPD insurance: The 'TPD payout from the super fund' is 'tax-free' if the 'TPD condition of release is met'.
  • TPD premiums deductible: The 'TPD insurance premiums' in the 'super fund' are 'deductible to the super fund'.

For the superannuation death benefits and the super rules, see our Superannuation Guide →.

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