Insurance and Taxes: How do they relate?
Paying tax is important. The cash flow keeps our public services running, keeps our infrastructure sound and gives a helping financial hand to those in need. Though. none of us like paying more tax than we have to though, so here are some insurance deductions that you might be missing.
Life insurance is a broad term that covers different types of policies that include life (death) cover, income protection, total & permanent disability (TPD) and trauma insurance. When it comes to tax time, claiming a tax deduction on premiums and claims benefits depends on the type of cover, and whether or not it’s paid through your super fund.
INCOME PROTECTION AS A TAX DEDUCTION
Generally you can claim a tax deduction on any premium you pay for insurance against loss of income. As permitted by the Australian Taxation Office, income protection insurance premiums paid under individual policies can be claimed as a tax deduction.
The amount you can claim as a deduction on your income insurance premium is based on your marginal tax rate – which is set based on your annual assessable income.
But be warned, if you pay your income protection insurance through your superannuation fund, you cannot claim a deduction. Your fund will claim the deduction on your behalf, which is then reflected in your annual superannuation statement rather than your tax return. So you’re still getting the benefit, just not directly.
TAX DEDUCTIONS ON OTHER TYPES OF LIFE INSURANCE
Any standalone life insurance policy that compensates you for physical injury or death such as life insurance, TPD and trauma insurance cannot be claimed as a tax deduction.
However, In the instance where a life insurance policy is paid through your superannuation fund, the premiums may be tax deductible and your fund will claim the deduction on your behalf.
TAX LIABILITIES ON INSURANCE CLAIMS
So do you pay tax on an insurance pay out? In the event that you claim on your income protection policy, the benefits you receive will be assessed and liable for tax just like your regular income.
A claim made on other forms of life insurance such life cover, TPD and trauma insurance is generally tax-free. Where a policy is held through a superannuation fund, the benefit can be subject to tax and at different levels depending on a number of factors including: age, your eligible service period and whether the beneficiaries are financially dependent or not.
Insurance (and tax!) is a specialist area that is complex for the majority of people unfamiliar with its finer details as deductions and policies may vary depending on your individual circumstances.
At Vogue Financial, we offer a strategic service where we can assess your requirement for cover, the structuring of that protection to ensure it is tax effective and gets the most discounts possible and source the most appropriate provider for the insurance product to ensure you and your family are adequately protected while also making the most of your financial future. Contact us today to find out how.