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Is Life Insurance Tax Deductible?

Regardless of how careful you are, unexpected events happen and may affect your ability to work. If you have dependents who rely on your income, life insurance is non-negotiable. You may be wondering, 'Is life insurance tax deductible? 'It's not a simple yes or no answer, and will depend on the type of cover and how you pay your premiums. Let's look at the different types of life insurance and the factors affecting your premiums.

Superannuation Life Insurance Vs Outside Life Insurance 

While insurance type affects tax, obtaining life insurance through your super fund or outside it will also determine whether you can claim the premiums.

Obtaining life insurance through superannuation

According to ASIC, most super funds provide a basic level of life insurance, total and permanent disability cover, and income protection. This is usually cheaper than purchasing insurance outside your fund, as premiums are deducted from your super balance. However, cover through your super is not tax-deductible, and may not be sufficient depending on your financial and health status.

Obtaining life insurance outside of superannuation

Purchasing life insurance outside your super fund may be beneficial if you need a higher level of cover. Income protection insurance is personally tax-deductible, and your income level and tax bracket will determine the amount you can deduct. However, the ATO advises that life insurance is not tax-deductible when the policy covers physical injury such as life, TPD, or trauma cover, even when purchased outside of super.

Different Types of Life Insurances

People often use life insurance as an overarching term to explain the different life cover types, yet each protects against specific events. 

Life Insurance

Life insurance supports your dependents financially in the event of your passing. A pre-determined amount of money will be given to your nominated beneficiaries to reduce the financial burden of losing your income.

Trauma Insurance

Trauma insurance is designed to support you financially if an illness or trauma such as a disease, heart attack, or stroke temporarily prevents you from working. It would pay a lump sum to help pay medical bills, mortgage repayments, or rehab costs. While it's similar to TPD insurance, it assumes you will be able to return to work eventually.

Total & Permanent Disability (TPD) Insurance

If you suffer an injury or illness that prevents you from working permanently, TPD insurance will pay a lump sum or monthly payments to assist with rebab, medical, or living expenses. Depending on the policy, this type of cover can also support your dependents if you can no longer support them financially.

Income protection insurance

Income protection insurance protects people if an injury or illness affects their ability to work. It's beneficial and popular among self-employed people or small business owners who can access up to 70% of their pre-tax income for the period they're unable to work.

Factors that contribute to the insurance premium

Age

The general rule of thumb is the younger you are, the cheaper your insurance premiums. This is based on the assumption that the younger you are, the healthier you are. Your premiums may increase as you age, depending on the type of cover, company, and other factors.

Dependants

As your personal situation changes with the addition of a spouse and children, your level of cover may need to increase, resulting in higher premiums. In contrast, when your children leave home, you will need less cover, reducing your premiums.

Gender

Women have a longer life expectancy than men, and so typically pay lower premiums.

State of your health

Health is a significant factor that affects your life insurance premiums. If you have a healthy lifestyle without any pre-existing illnesses, you can expect to pay a lower premium than someone who has poor health outcomes. Insurance companies may request a health check to determine your premiums and required cover level.

Whether you smoke

Smoking has been shown to increase the risk of heart disease and stroke. Smokers can expect higher life insurance premiums, as their risk of illness and injury is higher than that of non-smokers.

Occupation

What you do for a living will affect your premium and may determine whether an insurance company will cover you. An office worker's risks are entirely different to a builder's. Insurance companies use data to assess occupational risk and calculate life insurance premiums accordingly.

Income level

Your life insurance policy will need to be sufficient to cover your salary or wages. Generally, the higher the income, the higher the premiums.

Debt level

Suppose you have a significant level of debt, such as mortgages or business loans. In that case, you may need a higher cover level and pay higher premiums to help your loved ones repay these debts you lose your income. 

Can You Claim Life Insurance On Tax?

  • It depends on the type of cover and whether you've purchased it outside your super fund.
  • The ATO advises that income protection insurance purchased outside your super fund is personally tax-deductible.
  • Any life insurance purchased outside your super fund covering injury is not tax-deductible.
  • Regardless of the level and type of cover, life insurance cover through your super fund is not tax-deductible. However, it is beneficial, as the payments are deducted from your super balance.

Summary

Choosing the right life insurance policy can be confusing, with each company offering different covers and premiums. To find a competitive policy to give you peace of mind, head online to Compare and Connect to compare life insurance providers in Australia.

Pradeep Raj 05 Jul 2022

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