Can you claim life insurance on tax? The short answer: it depends on the type. Here's exactly what's deductible and what's not for Australian taxpayers.
Complete guide to life insurance in Australia covering types, costs, and how to apply
Detailed comparison of retail vs super life insurance: TPD definitions, costs, portability
Self-employed life insurance guide for sole traders, contractors, and business owners with special strategies
When Australians ask "Is life insurance tax deductible?", they usually mean their personal life cover. The quick answer: No, personal life insurance premiums are not tax deductible.
But the full picture is more nuanced. While you cannot claim standard life insurance on your tax return, other types of personal insurance ARE deductible. Income protection insurance, in particular, offers a significant tax benefit that many Australians overlook.
Here is the breakdown by insurance type:
The reasoning from the ATO is straightforward: life insurance protects your family after you die, not your ability to earn income. Income protection, by contrast, directly replaces your taxable income if you cannot work, so the ATO allows the premium as a deduction.
Let us examine each type in detail.
Understanding which premiums are deductible can save you thousands of dollars over the life of your policies. Here is a comprehensive comparison.
| Feature | Life Insurance | Income Protection(Recommended) | TPD Insurance | Trauma Insurance |
|---|---|---|---|---|
| Tax Deductible? | NO | YES (100%) | Partial | NO |
| ATO Reasoning | Capital payment, not income-related | Replaces taxable income | Death component deductible, disability not | Capital payment for illness |
| Typical Annual Premium | $800-$2,500/year | $1,200-$4,000/year | $600-$2,000/year | $500-$1,800/year |
| Tax Saving (32.5% bracket) | $0 | $390-$1,300/year | Varies (typically 10-20%) | $0 |
| Claim On Tax Return? | No | Yes - D5 or D9 | Partial | No |
| Special Conditions | Never deductible for individuals | Must be held outside super | Complex calculation required | Never deductible |
Tax treatment varies significantly by insurance type. Income protection offers the greatest tax benefit.
Life insurance premiums paid by individuals are never tax deductible in Australia. The ATO classifies life insurance payouts as capital payments rather than income replacement. Because the benefit does not replace your assessable income, the premium is considered a personal expense.
This applies to:
Exception: Business owners may claim life insurance as a business expense in specific circumstances (covered below).
Income protection insurance is the standout winner for tax purposes. Premiums are 100% tax deductible because the benefit directly replaces your taxable income if you cannot work due to illness or injury.
How to claim:
Example calculation:
| Income | Tax Bracket | Annual IP Premium | Tax Saving |
|---|---|---|---|
| $60,000 | 32.5% | $1,500 | $487.50 |
| $90,000 | 32.5% | $2,400 | $780.00 |
| $120,000 | 37% | $3,200 | $1,184.00 |
| $200,000 | 45% | $4,500 | $2,025.00 |
Important: Only income protection held OUTSIDE of superannuation is tax deductible. If your income protection is through your super fund, you cannot claim a personal tax deduction (though you still benefit from paying with pre-tax super contributions).
Total and Permanent Disability (TPD) insurance has a complex tax treatment. The ATO allows a deduction for the portion of the premium that relates to the "death benefit" component, but not the disability component.
In practice:
Why is it partial? TPD cover pays a lump sum if you become totally and permanently disabled. The ATO views this as a capital payment (like life insurance), not income replacement. However, because TPD policies often include a death benefit component, that portion is treated like life insurance for tax purposes, and since some TPD policies are bundled with life cover, part of the premium may be deductible.
Practical advice: The tax benefit on TPD is small. Most people do not bother claiming it, but if you have a large TPD policy, request a breakdown from your insurer.
Trauma (critical illness) insurance premiums are not tax deductible. The ATO treats trauma payouts as capital payments unrelated to income replacement.
Trauma cover pays a lump sum if you are diagnosed with a specified serious illness (cancer, heart attack, stroke, etc.). Because the payment is not replacing income, the premium is a personal expense.
Our advisers can help you structure your coverage to maximise tax benefits while protecting your family. Get indicative quotes from 9+ Australian insurers.
Get Free QuoteWhile personal life insurance premiums are not deductible, business owners have several options to claim insurance-related tax deductions.
Key person insurance protects a business against the loss of a critical employee or owner. Premiums may be tax deductible if:
Deductible: The premium is claimed as a business expense, reducing the company's taxable income.
Taxable: The payout is assessable income for the business.
Example: A small IT consultancy takes out $1 million key person cover on its lead developer. The annual premium of $2,800 is fully deductible as a business expense. If the developer dies, the $1 million payout is taxable income to the business.
Buy-sell insurance funds the purchase of a business partner's share if they die or become disabled. The tax treatment depends on the policy structure:
Self-owned policies (each partner owns their own policy):
Cross-owned policies (partners own policies on each other):
Super-funded buy-sell:
Business-owned policies:
The optimal structure depends on your business circumstances. Seek advice from a tax professional before implementing buy-sell insurance.
The ATO distinguishes between insurance that protects income (revenue) versus insurance that protects assets (capital):
| Insurance Purpose | Premium Treatment | Payout Treatment |
|---|---|---|
| Protect business income (revenue) | Deductible | Assessable income |
| Protect business assets (capital) | Not deductible | Capital gain/loss |
Key person insurance protecting against lost revenue is deductible. Business life insurance to pay off a loan is typically not deductible because it protects a capital asset.
One of the most popular ways Australians hold life insurance is through their superannuation fund. While you cannot claim a personal tax deduction for super insurance, there are significant tax advantages.
Although you cannot claim a deduction, insurance through super is paid with money taxed at only 15% (the super contributions tax rate). For most workers, this is significantly lower than their marginal tax rate.
Example comparison:
| Scenario | Marginal Rate | Insurance Cost | Effective Tax Rate on Premium |
|---|---|---|---|
| Retail policy (outside super) | 37% | $2,000 | 37% |
| Super policy (inside super) | 15% | $2,000 | 15% |
| Difference | 22% tax saving |
For someone on a 37% marginal rate, $2,000 of insurance through super costs the equivalent of $1,440 after tax. The same $2,000 outside super costs the full $2,000 (no deduction for life insurance).
Tax treatment is only one factor when comparing super and retail insurance. For a comprehensive comparison including TPD definitions, portability, and coverage flexibility, see our detailed guide: Retail vs Super Life Insurance: Which Is Better?
Key consideration: Income protection held inside super is NOT personally tax deductible. If you want to claim your income protection premiums, you must hold the policy outside super.
Understanding how premiums are taxed is only half the picture. The tax treatment of payouts is equally important for financial planning.
Tax-free in most cases. Life insurance death benefits paid to:
Are completely tax-free.
Potentially taxable: Payouts to adult children (18+) who were not financially dependent may include a taxable component, particularly for insurance held through super. The taxable component is taxed at the beneficiary's marginal rate (up to a maximum of 30% + Medicare levy).
Fully taxable. Because you claimed a tax deduction on the premiums, the income protection payments you receive are assessable income. They are taxed at your marginal rate in the year you receive them.
This makes sense: you are replacing taxable income, so the replacement is also taxable.
Generally tax-free when paid outside super. For TPD paid through super:
Tax-free. Trauma insurance payouts are capital payments and are not assessable income. You receive the full benefit without any tax implications.
Insurance and tax can be complex. Speak with our advisers to understand how different policy structures affect your overall tax position.
Book Free ConsultationNo. Personal life insurance premiums are not tax deductible for individuals in Australia. The ATO classifies life insurance payouts as capital payments rather than income replacement, so the premiums are treated as a personal expense. This applies to term life insurance, whole of life insurance, and accidental death cover.
The only exception is for business owners who hold key person insurance where the business is the owner and beneficiary, and the purpose is to protect business income.
The ATO allows tax deductions for expenses that relate to earning assessable income. Income protection insurance directly replaces your income if you cannot work, so the premium is considered a work-related expense. Life insurance, by contrast, pays a capital sum to your beneficiaries after death. It does not replace income you would have earned, so it is not deductible.
Think of it this way: income protection is insurance for your income (deductible), while life insurance is insurance for your life (not deductible).
Not directly. You cannot claim a personal tax deduction for life insurance held through super. However, super insurance offers a tax advantage because premiums are paid from your super balance, which was contributed with money taxed at only 15%. For most Australians, this is lower than their marginal tax rate, creating an effective tax benefit.
If you want a direct tax deduction, income protection insurance held outside super is the only life insurance-related premium that individuals can claim.
Include the full annual premium at Item D5 (work-related self-education expenses) or Item D9 (other work-related expenses) on your individual tax return. Keep your premium statement from the insurer as evidence. The deduction applies to the full premium, regardless of whether you make a claim during the year.
If you use a tax agent, provide them with the premium statement and they will include it in the appropriate section.
Usually no. Life insurance death benefits are tax-free when paid to:
Payouts to adult children (18+) who were not financially dependent may have a taxable component, especially if the insurance was held through super. The taxable portion is taxed at the beneficiary's marginal rate, up to a maximum of 30% plus the Medicare levy.
For insurance held outside super and paid to dependents, the entire payout is tax-free in almost all circumstances.
Understanding the tax treatment of different insurance types can help you structure your coverage more effectively:
Income protection is your best tax deduction opportunity. If you hold income protection outside super, claim the full premium on your tax return. At a 37% marginal rate, a $3,000 annual premium saves you $1,110 in tax.
Life insurance premiums are never deductible for individuals. Do not try to claim them. However, holding life insurance through super provides an effective tax benefit through lower contribution tax rates.
Business owners have more options. Key person insurance and certain buy-sell structures can provide legitimate tax deductions. Speak with a tax professional about the optimal structure for your business.
Consider the tax treatment of payouts, not just premiums. Income protection payouts are taxable, while life insurance payouts are generally tax-free. This affects how much coverage you actually need.
Structure matters. The same coverage can have different tax implications depending on whether it is held inside or outside super, owned personally or by a business, and how beneficiaries are nominated.
For personalised advice on structuring your insurance for maximum tax efficiency while maintaining comprehensive protection, speak with a licensed financial adviser who understands both insurance and taxation.
General Advice Only
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