Are life insurance payouts taxed in Australia?

Life insurance payouts in Australia are generally tax-free in most circumstances, but the tax treatment depends on who receives the payment and whether the policy is held inside or outside superannuation. For policies held outside super (retail policies), death benefits paid directly to beneficiaries are completely tax-free, regardless of who receives them. For policies held within superannuation, the tax treatment is more complex: if the benefit is paid to a 'death benefits dependant' (spouse, children under 18, financial dependents, or someone in an interdependency relationship), it's tax-free. However, if paid to a non-dependent adult child or other non-dependent beneficiary from super, the taxable component of the benefit may be taxed at up to 15% plus Medicare levy (17% total). Terminal illness benefits paid while you're alive are generally tax-free. Life insurance proceeds that pass through your estate before reaching beneficiaries may have different tax implications. The tax-free nature of most life insurance payouts makes them particularly valuable for Australian estate planning. Unlike other investment assets that may trigger capital gains tax, life insurance provides tax-effective wealth transfer. If you want to ensure completely tax-free benefits to adult children, consider holding your life insurance outside of superannuation, though this means paying premiums from after-tax income. Consult a financial adviser to structure your policy optimally for tax purposes.