Which Life Insurances Are Paid Tax-Free?

Life insurance policies can save you from financial trouble during emergency situations. They can cover the expenses arising from unexpected events, keeping you from worrying about where to get money in an instant. If you don’t have enough savings in your bank account, life insurance policies can be your lifesaver.


Life insurance often provides lump-sum payments, but you might be wondering whether the money you’re getting is free of tax. Well, that depends on the type of insurance and how the premium is paid.


Types of Life Insurance Policies

There are basically 4 types of life insurance available in Australia.


1)      Life Insurance

When you pass away, this type of insurance will pay a lump sum to your family.


Most life insurance policies will pay out the beneficiaries early if you’ve been diagnosed with a terminal illness.


2)      TPD Insurance

Total and permanent disability (TPD) insurance policies help cover the cost of loan repayments, hospital bills, and rehabilitation when you become permanently disabled and considered to be unfit to work.


TPD insurance comes in a form of a lump-sum payment that can do a lot when paying for immediate medical expenses.


3)      Trauma Insurance

Trauma insurance helps you cover the cost associated with major medical situations including cancer, heart attack, or stroke. It takes away the problem of worrying about money because it pays out a one-off lump sum you can use to pay for immediate expenses.


You can use the money to buy mobility equipment or pay for medical bills. You can also use it to pay for mortgage, plan a vacation, or for whatever purpose you have in mind.


Trauma insurance can be bought alone or as a part of a life insurance package.


4)      Income protection

If you suddenly lose your job or the capacity to earn money due to an injury or a long-term illness, income protection can help cover living expenses. Income protection policies can pay you up to 85% of your usual rate for a certain period.

Taxes on Premiums and Benefits

According to the ATO, premiums on insurance policies taken from super accounts are not tax-deductible. In this case, the cost of insurance comes from the super balance that already has tax deductions.


However, it’s different when it comes to SMSF. If the premiums are paid through an SMSF, it’s possible to claim tax deductions on insurance premiums. The process can be quite complicated, so it’s best to get help from a tax accountant or financial adviser for this matter.


Premiums for life, TPD, and trauma insurances are also not tax-deductible outside of super. But the premium for income protection is tax-deductible outside super.


One thing to remember is to not get the premium confused with the benefits when it comes to taxes.


The benefits for income protection will be taxed every month it’s paid to beneficiaries. On the other hand, lump-sum payments for life, TPD, and trauma insurances are usually tax-free. So long as the latter isn’t purchased through a super fund, it’s almost always tax-free.



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