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Hudson Financial Planning - Tax implications for Life and TPD Insurance

Tax Implications For Life And TPD Insurance

Written by Aaron Alston – Financial Adviser

There are potential tax implications for a policyholder or family member as a result of a successful claim on Life and TPD Insurance.


LIFE INSURANCE

Life Insurance funded personally: If a Life Insurance benefit is personally owned the lump sum payout from a Life Insurance policy is tax free when paid to a nominated beneficiary. 

Life Insurance funded through superannuation: If a Life Insurance benefit is owned through superannuation the lump sum payout from a policy is tax-free when paid to a dependent beneficiary. Payments to non-dependants are subject to tax on any taxable component which may include both a taxed and/or untaxed element.

Generally speaking, people who are considered to be a dependant for tax purposes to a policyholder include:

  • Spouse*
  • Any child under the age of 18
  • Financial dependant (adult children residing with their parents receiving financial support)
  • Interdependent relationship (characterised by a close personal relationship, living together, financial and domestic support, and personal care above what is provided by a friend)

You can also nominate your legal personal representative as your beneficiary and your death benefit is paid to your estate and will be subject to your will being legally valid.

*If you have a former spouse listed as your super beneficiary they can only receive your superannuation through your estate, not your fund as they are dependants for tax purposes not for your SIS (Superannuation Industry (Supervision) Act 1993) purposes.

Generally speaking people who are considered to be a non-dependant for tax purposes to a policy holder include:

  • Children over the age of 18 who are financially independent
  • Any other non-financial dependant that does not meet the criteria for dependents above (e.g. close family friend)

TPD INSURANCE

TPD Insurance funded personally:  If a TPD Insurance benefit is personally owned the payout from TPD Insurance policy is tax free.

TPD Insurance funded through superannuation:  If a TPD Insurance benefit is owned through super the payout from a TPD Insurance benefit is subject to tax on the taxable component lump sum which is calculated via a formula.

If you would like to speak with a Hudson Adviser if you are worried about potential tax implications on your insurance policies please call 1800 804 296 or submit a contact form directly on our website. 

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