A Guide To Paying Taxes on Life Insurance Payouts

Do I have to pay taxes on life insurance?

The answer to this question depends on what kind of life insurance you have, who your beneficiaries are, and whether or not you buy it inside or outside of your superannuation.

Ahead, we'll take a look at taxes as they relate to life insurance.

We cover premium deductions, taxes on benefits, superannuation limits, and more so you know what to expect when shopping for life insurance.

Taxes and life insurance

Most people think of lump-sum death benefits when using the term "life insurance."

Generally, the answer to, "do I have to pay taxes on life insurance?" is no, you do not.

This answer is assuming that the death benefit goes to your financial dependents.

Your spouse and children, for instance, usually won't have to pay taxes if they receive a lump-sum life insurance payout.

The answer changes when the payout goes to non-financial dependants, however.

Your beneficiaries can be taxed up to 35% on the payout in this case.

Adult children, business partners, and anyone else who doesn't rely on you for financial stability will have to face this tax.

Life insurance payouts

People often nominate their children or spouses as a life insurance beneficiary.

A spouse usually does not have to pay any taxes on the life insurance benefit since they are considered a financial dependent.

Children, on the other hand, might face the tax if they are over 18.

Children over 18 years of age are generally no longer considered financial dependents for life insurance purposes, so they may be taxed on a payout.

The payouts will either come to your beneficiaries in a lump sum or through spaced-out instalments.

The lump sum can help cover major debts, while the instalments can help supplement the lost income of a death in the family.

Are life insurance premiums tax deductible?

Whether or not you will pay taxes on the life insurance payout -- and whether or not you can deduct it -- depends on whether or not you buy it inside your superannuation fund.

In some situations you are able to claim a tax deduction for life insurance premiums.

You can claim for premiums that you pay to insure against the loss of income, as long as you have purchased the income protection policy outside of your super fund.

There is an exception for self employed workers, who may be able to deduct premiums for income protection policies held in super.

Premiums for other forms of life insurance held outside of super---like term life cover, TPD cover, and trauma cover---are typically not tax deductible.

However, life cover and TPD cover through super is usually tax deductible.

The catch is that it's tax deductible to the fund, not to you personally.

While you can't claim for the cost of premiums on your personal taxes, the fund usually passes the tax deduction to your account.

If you are self-employed and your policy is purchased through a superannuation fund, you may be able to claim a deduction on contributions made to fund the premiums.

Concessional contributions

Concessional contributions refer to the pre-tax contributions you make to your superannuation fund.

These includes the savings you want for the year along with any insurance premiums you make through your fund.

There is only so much pre-tax income you can contribute to your super before facing an excess contribution tax.

It's important to know these limits so you don't end up paying extra taxes, which can sometimes be around 45% or even 50% depending on the year.

These limits change every year, along with the age requirements.

Stay up to date with the caps to make sure you're not paying more than you have to in taxes.

Comparing life insurance policies

Comparing life insurance policies is the best way to ensure you're not missing anything in case the worst happens.

Consider whether or not you want to secure life insurance through your superannuation.

The premiums are made with pre-tax income, but they also count towards your concessional contribution cap, limiting the amount you can contribute to your super before facing taxes.

There is also more of a limit on policies you buy through your super.

You can't secure policies like trauma insurance, which you may benefit from.

Either way, it's important to arm yourself with knowledge when choosing a life insurance provider.

Get started with our comparison tool today.

Matthew Lang is the general manager of life insurance at Compare Club. Matthew leads a team of dedicated professionals who are passionate about helping individuals and families make informed decisions about their life insurance needs. Whether it's finding the right coverage for your specific circumstances, comparing policies, or optimizing your existing policy, Matthew and his team are here to provide expert guidance and support.

Meet our life insurance expert, Matthew Lang

Matthew's top life insurance tips

• 1

  Identify what you want out of life insurance before you buy. Knowing the purpose of your life cover will help you choose a policy that meets your needs.

• 2

  It's easy to assume that the sole purpose of life cover is to leave money behind for your family, but there's more to it than that.

• 3

  Life insurers like those on our panel pay an average of 97% of claims in full.

• 4

  There are different types of life insurance, including term life insurance, income protection, trauma cover and total and permanent disability cover.