Risk Insurance - Tax Implications

Taxes on your life insurance

Life insurance and income protection policies are very popular. The implications of a claim in relation to tax and other government benefits are sometimes overlooked however.

Tax refund

The premium you pay on "income protection insurance" is tax deductible. So at the end of the year you can claim 100% of this as an expense, even if you are on wages. If you were to make claim on "income protection insurance" you will generally get 75% of your pre disability income paid to you on a monthly basis, before tax. However note that if you receive the sickness benefit or ACC, the amount of your claim will most likely be reduced. This may not be the case with mortgage repayment insurance.

Lower your ACC levy

ACC covers you for the loss of income and medical expenses for an accident. Many people decide that they want cover for illnesses as well, so take income protection insurance. This means that in many cases the cover for an accident is duplicated. If you are self employed however, you could reduce your ACC levies by using ACC "cover plus extra". This enables you to set a lower amount of cover from ACC for a lower levy which is handy if you know you will be covered from your own income protection insurance anyway.

Do I pay tax on my life insurance?

Taking a life cover under your company name may seem great for tax deductibility of the premiums but this will most likely mean that the company will pay tax on any claims arising as well. This can end up being a lot of money and may mean that you need a lot more cover to do the same job. To avoid this it could be cheaper to take non tax deductible cover for a lower amount under your personal name. When taking income protection for a business it is also important to be aware of the kind of proof of income might be required when and if you may need to make a claim. Indemnity type policies require proof of income at claim time which can be a challenge for many self employed people. You could look at an agreed type cover or business overheads insurance to avoid this challenge.

Fringe benefit tax

If you own a business and run your personal insurances through the business as expenses, you will probably be liable for fringe benefit tax. It is important to check how much this might be with your accountant.

In summary the key points to remember are:

- Income protection insurance is tax deductible even if you are on salary
- ACC cover plus extra can be a good way to avoid duplicating cover for accidents
- Any claim on an insurance owned by a business may also be liable for tax

Ask your accountant about the implications of your insurance structure or find a good insurance broker who can liaise directly with your accountant