Are Life Insurance Payouts Taxed?

Life insurance is a crucial safety net for your loved ones, but does the government take a cut? Here’s a quick guide to clear things up.

Types of Life Insurance

• Life Insurance (Death): Pays a lump sum to your beneficiaries (like your spouse or kids) if you pass away, sometimes even if you’re diagnosed with a terminal illness.

  
  

• Total Permanent Disability (TPD) Insurance: Pays out if you become permanently disabled and can’t work.

  
  

• Critical Illness Insurance: Pays out if you suffer a serious medical event, like a heart attack or stroke, to help with recovery costs.

  
  

• Income Protection Insurance: Provides monthly payments if you can’t work due to illness or injury.

  
  

Are Life Insurance Payouts Taxed?

Good news: Life insurance payouts are usually tax-free, especially when going to financial dependents like your spouse or children. This applies to death insurance, TPD, and critical illness insurance. However, income protection payouts aren’t tax-free and may be taxed monthly.

What About Life Insurance Premiums?

• Life insurance, critical illness, and TPD policies (outside super) are generally not tax-deductible.

• TPD insurance inside your super can be tax-deductible,

• Income protection insurance (regardless of where you buy it) is usually deductible.

  
  

Life Insurance through Super?

Life insurance purchased through your super is not tax-deductible, though there’s a possible exception for those with a Self-Managed Super Fund (SMSF). It’s best to check with your accountant about this.

Bottom Line:

Life insurance payouts are usually tax-free, but premiums for death, TPD, or critical illness insurance aren’t tax-deductible (unless it's income protection). Always check your policy and speak to an expert if you’re unsure.