Will my claims payments be taxed?

Life insurance is designed to provide vital financial support to you and your loved ones during the toughest times, but will you or your beneficiaries need to pay tax on the payouts?

It’s an important aspect of financial planning. If you pass away or are unable to work, your benefit payment could be a financial lifeline. Whether your benefit will be taxed varies depending on the insurance type and circumstances.

Life insurance

Also known as death cover, life insurance pays a lump sum if you pass away or are diagnosed with a terminal illness.
In Australia, these payouts are generally tax-free when the policy is held outside of superannuation. If held inside your super, they are often tax-free when paid to financial dependents like a spouse or child under 18 years, but taxable for non-dependents. It’s important to read your policy’s Product Disclosure Statement (PDS) to understand when your beneficiaries will be taxed for a payout.

Critical illness Insurance

Also known as trauma cover, critical illness insurance pays a lump sum if you’re diagnosed with one of the specified illnesses listed in your policy. In Australia, the benefit from a critical illness policy is typically paid out tax-free, depending on the type of policy you hold.

Total and permanent disability insurance (TPD)

TPD insurance pays a lump sum if you become totally and permanently disabled and are unable to work ever again. The tax treatment of TPD benefits in Australia depends on the structure of the policy. If your policy is held outside of super, the benefit is generally received tax-free. However, if it’s held within super and the benefit is accessed before you reach a condition of release (such as retirement age), the payout may be subject to tax.

Income protection

Income protection insurance replaces up to 70% of your income if you’re unable to work temporarily due to illness or injury. In Australia, income protection benefit payments are generally considered taxable income and may need to be included in your tax return. However, the premiums you pay for your income protection insurance held outside super are generally tax-deductible, which can help offset the tax payable on any benefits received. Premiums paid for your income protection insurance held within super are not tax-deductible to you.

Funeral insurance

Funeral insurance pays your beneficiaries a lump sum to cover funeral costs, and this is generally tax-free. Tax laws and personal circumstances vary. I can help you understand how and if your benefits will be taxed and customise a policy that provides sufficient financial support for you and your loved ones.

Any advice is general in nature only and has been prepared without considering your needs, objectives or financial situation. Before acting on it, you should consider its appropriateness for you, having regard to those factors. Before making any decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement.