One question that people have about trauma insurance is whether or not the premiums are tax deductible.
In most cases, the simple answer is ‘no’, but there may be some cases where they premiums are a tax deduction.
Understanding Tax Deductions
In Australia, to obtain a tax deduction for an expense, there usually has to be a direct connection between that expenses and some income that was derived as a result of the expense being incurred. For example, if you borrow money to invest, your interest cost may be tax deductible, but the income from your investment would be taxable.
A different example are Income Protection premiums. Here in Australia, the premiums you pay for Income Protection are usually tax deductible. However, if you make a claim on your policy, any income paid by the insurer will become assessable income in the year it is paid. So you can gain a deduction today for income that you may earn in a future year (or hopefully never earn!).
Making Trauma Insurance Tax Deductible
In most cases, your trauma insurance premiums won’t be tax deductible. This is ok, because if you make a claim in the future, that lump sum won’t be taxable.
There are two scenarios that could make your Trauma Insurance Premium a tax deduction:
- If the cover is part of keyperson insurance cover for a business. In this instance the business takes insurance cover over key people in the business, so in the event they suffer a trauma or die, a lump sum is paid to the business from the insurance policy to cover the resultant loss of income. The yearly premiums can be tax deductible, however any lump sum that is paid is treated as assessable income to the business.
- You can elect to hold your trauma insurance within a superannuation fund. If you are able to make deductible contributions to super, or salary sacrifice, then the premium can be a tax deduction, because the premium has become a superannuation contribution. The problem with this strategy however, is that the insurance proceeds, if paid, are paid to the super fund. The Trustees of the fund are then bound by superannuation rules regarding whether the money can be paid out to the member, or have to remain in the fund. In most cases, unless you’ve retired, or are totally and permanently disabled, the funds won’t be able to be paid out to the member. This defeats the purpose of having the policy, if the proceeds can’t be paid to the insured until they’ve retired. You will also find that most retail superannuation funds will refuse to include trauma cover in their funds for this reason. If people choose to do it, they usually use a self managed super fund.
The issues relating to tax deductions in trauma insurance are complicated and depend very much on an individual’s circumstances. We recommend you obtain specific taxation advice to learn more about the whether you’re able to make your trauma insurance policy premiums tax deductible.