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Insurance in super

Taxation of insurance premiums

Section: 13.4

The deductibility of insurance premiums for super fund trustees is shown in the following table.

Insurance type Non-super: tax treatment of premiums Super: tax treatment of premiums
Life cover (including terminal illness) Not deductible1 Deductible to the fund 2
TPD cover Not deductible1 Any occupation cover: generally fully deductible to the fund 2

Own occupation cover: Proportion of premium used to fund 'any occupation' component generally deductible to the fund 2. Remainder not deductible to the fund.

Income protection Generally deductible to the policy owner Deductible to the fund 2
Trauma cover Not deductible to the policy owner1 Not deductible to the fund

1. Excludes situations where cover is held for a revenue purpose or where cover is paid for by the employer but owned by the individual.

2. Deduction applies to the extent that the policy is for a liability of the fund to pay the member/LPR/dependants a death, terminal illness or disability super benefit (including temporary disability benefit).

Alternative - future service deduction

Instead of claiming a tax deduction for insurance premiums during a financial year, a fund trustee can elect instead to claim a tax deduction for the future service portion of eligible benefits (consisting at least partially of insurance proceeds) that it pays out, including:

  • A superannuation lump sum death or disability benefit
  • A superannuation income stream death or disability benefit
  • A series of income protection payments

If made, this election applies to all fund members. The tax deduction available is calculated as follows:

Benefit amount X (future service days / total service days)

Where:

  • Benefit amount is the total value of the super lump sum or pension commenced, or in the case of income protection benefits the amount of payments during the year
  • Future service days is the number of days from the date of termination of employment (or inability to be gainfully employed) to the member's last retirement date
  • Total service days is the existing service period of the superannuation benefits plus future service days

A trustee can elect to apply the future service deduction instead of claiming a tax deduction for insurance premiums in any financial year (even if deductions have been claimed for premiums in previous years). However, once this election is made, it is generally irrevocable and applies in all future years.

Where insurance proceeds are paid out as a death or disability benefit, the trustee can only claim this future service deduction if the benefit is paid as a consequence of the member terminating employment. In practice, this requirement may render the deduction difficult to claim in most cases.

This requirement does not apply where the future service deduction is claimed as a result of income protection benefits being paid from the fund.

Last modified: Tuesday, May 2, 2017