Insurance Policies

Tax deductions available for Insurance Policies

One of the major advantages of establishing self managed superannuation is the option of purchasing death and total and permanent disablement policies with your superannuation. The SMSF insurance policies purchased with superannuation monies are tax deductible to the fund, provided it maintains its complying status with the SIS Act. By purchasing insurance policies with superannuation monies, members of the fund are freeing up cash flow from their salary.

It is analogous to an early release of superannuation monies, without breaching the superannuation laws.

Income protection insurance policies are tax deductible provided the payment period of the policy is less than 2 years. The members of the SMSF can have access to the policy provided the incapacity condition of release has been satisfied – section 267 ITAA 1936. The proceeds of life insurance policies are received tax free by self-managed super funds, in the year it is paid out and declared in the annual tax return and compliance. This is further to the premiums being tax deductible in the preceding years when paid. The tax deductions available are detailed below:

Term Life100% deductible
Whole of Life30% deductible
Endowment10% deductible

Where the proceeds of a life insurance policy are paid to non-dependants, or directed to the benefit of non-dependants via an estate, a portion of the proceeds will be treated as a taxable component, and taxed at the rate of 30% plus Medicare Levy- section 27AB & section 159 ITAA 1936.

Different method for claiming tax deductions on insurance policies

Trustees have an alternative option of claiming a tax deduction for the provision of life insurance under section 279B of ITAA 1936. Where this election is nominated, the method used under s279B must also be adopted in the next financial year. This method of claiming a tax deduction is only available in the year the death benefit is payable.  This method of claiming a deduction is most tax effective, the younger the deceased i.e. for members less than 65 years of age receiving a large death benefit payment.



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