When looking into life insurance policies in Australia, it's important to get an understanding of the entire process, from how much the premiums are to taxes on life insurance benefits. Do you need to pay taxes on Life Insurance in Australia? What type of taxes do you need to pay on top of your premiums and how Life Insurance payout is taxed?
What is Life Insurance?
Life Insurance provides a lump sum payment to the family or other beneficiaries when the life insured dies or becomes terminally ill.
Life insurance was traditionally designed for anyone with a family, dependant relatives or debt. Mortgage, kids education and other outstanding financial commitments will still be there and the life insurance payout will help your loved ones to make life's end. In simple terms if you had a life insurance policy and you died, then your beneficiaries would receive a lump sum pay out.
Tax on Life Insurance Premiums
The amount of the premium payable is determined by life insurance companies, in consultation with actuaries. After receiving the premiums, and deducting any expenses, the life insurance companies invest the remainder in a range of assets, including cash, fixed interest securities (both government and corporate), equities, properties etc. The accumulated assets are then used to pay out risk policies when the insured lives die.
Most of the time insurance companies will pass on to the policy owner any government taxes and charges (such as stamp duty) which their incur in relation to life insurance policy and which are not included in the premium rates.
Policy Fee. The premium usually includes Policy Fee for each life insured on the policy. If Policy Fee is not included in the premiums, it will be shown as a separate item on the plan schedule. The Policy Fee may be adjusted every year by the indexation factor.
Stamp Duty. Stamp duty is a government fee that may be charged in addition to the premium. The stamp duty payable is based on the state where you reside. The rate of stamp duty varies from state to state:
- no stamp duty on life insurance in Western Australia
- 1.5 percent of the first year’s premium on the policy in South Australia
- 5 percent of the first year’s premium on the policy in - NSW, Victoria, Queensland, Tasmania, NT and ACT.
Goods and Services Tax (GST). Currently GST is not charged on life insurance premiums.
Tax Deduction. Premiums are generally not tax deductible for individuals. If you are in business and take out this cover for revenue purposes (for example, replacing business income if a key person dies), the premiums will generally be tax deductible. If you are in business and take out this cover for a capital purpose (for example, repaying a debt if a keyperson dies), then the premium is not tax deductible.
Tax on Life Insurance Payout
If you are the beneficiary for death benefits on a life insurance policy, the amount is not subject to income taxes. This means that any amount paid out to a beneficiary does not need to be included as income for taxable purposes. This privileged treatment under the law applies to most life insurance policies, regardless of the cash value or how long the policy was held.
If you are in business and take out this cover for revenue purposes (for example, replacing business income if a key person dies), any benefits received will generally be assessed as income and therefore taxed. If you are in business and take out this cover for a capital purpose (for example, repaying a debt if a keyperson dies), then the proceeds will not be subject to income tax. However, CGT may apply depending on who receives the proceeds.
The taxation information outlined here is based on the continuation of present laws and their interpretation and is a general factual information only. Individual circumstances may vary. You should consult your professional tax adviser for advice regarding your personal situation. Further taxation on life insurance information can be found at www.ato.gov.au. And if you would like to figure out your salary after tax - please use our tax calculator.