Chan & Naylor
Sydney CBD Central

In general, life insurance payouts won’t be taxed if the death benefits are paid to the spouse, children, or to anyone who is a financially dependent beneficiary of the deceased. However, life insurance purchased through a superannuation fund can be taxed if it was paid to non-financial dependents.

How are life insurance premiums and benefits taxed?

In most cases, if a life insurance policy was bought outside of superannuation, premiums will not be tax deductible. Also, payouts outside of super are usually not taxed when paid to dependents. However, if they are paid to non-financial dependents, they can be taxed up to 35%.

On the other hand if the life cover was bought through a superannuation fund, the premiums are usually deductible when they are paid from the member’s pre-taxed income. In addition, similar to cover bought outside super, payouts to dependents are generally not taxed but can be taxed up to 35% if paid to non-financial dependents.

How beneficiaries will receive their life insurance payouts

A life insurance policy will typically pay a lump sum to the deceased’s nominated beneficiary. The deceased may have also chosen an option where their insurer will pay the money in a series of installments to the beneficiaries.

If the deceased did not nominate any beneficiary, the death benefits will be paid to their estate and divided according to their last will and testament.

Will beneficiaries have to pay tax on life insurance payouts?

While death benefits will generally be paid to beneficiaries as a tax-free lump sum, there are a few instances where they may have to pay taxes. Some examples are:

  • The beneficiaries are not financially tax dependent as stated in the Income Tax Assessment Act 1997. Commonly, this refers to a child who is over 18 years old and was no longer financially dependent on the deceased at the time of death.
  • After the time of death, the executor of the will holds on to the death benefits in which any interest obtained during the holding period could also be taxable as part of the beneficiaries’ income.
  • The life insurance policy of the deceased is held by a business or a third party for monetary value or other compensation.

Other types of insurance

There are four types of insurance which are Life (or death) cover, Total and Permanent Disability (commonly known as TPD) cover, Trauma (or Critical Illness) cover, and Income Protection. Here’s how they are normally taxed in Australia.

Life Insurance Type
Will premiums be tax-deductible?
Will benefits be taxed?
Trauma / Critical Illness (outside super)
Total and Permanent Disability (outside super)
Total and Permanent Disability (super)
Income Protection (outside super)
Income Protection (inside super)
Yes (if self-employed)
Yes (for self-employed policyholders)

It should be noted that these are general nature and does not consider your own personal circumstances.
Life insurance and taxes are complex and everyone’s situation is different which is why you should seek a professional’s advice.
Talk to a Chan & Naylor tax accountant so you can be confident that every dollar will go to your loved ones when they need it most.