Over the years, Australian families have continued to suffer financial and emotional pain caused by illnesses and injuries. Indeed, it is not pleasant to think about such eventualities, but that does not prevent them from happening. The best approach should be a proactive one - to ensure that you and your family do not suffer in the event that you as the bread winner are diagnosed with a total and permanent disability. When taking out TPD insurance, most people are looking for tax benefits, which is why it is important to understand the tax treatment on Total and Permanent Disability.
The lump sum amount received from the policy is not taxed; however, premiums on the policy are tax deductible. Tax treatment varies depending on whether the cover is held outside or inside superannuation. If this type of insurance is held as a standalone cover and is outside superannuation, then it is not tax-deductible. Unlike other policies such as income protection, TPD is not meant to offer replacement of income; it only serves as financial compensation due to permanent disability. In respect to this, premium payments are not a form of assessable income, and neither are the benefits. It is also important to note that TPD insurance is generally tax free when paid to the holder of the policy or to nominated beneficiaries.
Tax treatment Within Super
As of July 2011, TDP premiums are tax deductible under a super fund if they meet certain conditions. The policy holder must have suffered from mental or physical disability. They are also unlikely to work again in a capacity suited to their training, education or experience. They must also provide evidence that is certified by a medical practitioner to demonstrate their incapacity to work and that they suffer from a physical or medical condition. Note that the policy should fall under the 'any occupation' cover. Under 'any occupation' the insurance premiums are generally 100 percent tax deductible, provided the super benefit definition on disability has been complied with. TPD under 'own occupation" taken inside super fund is treated differently; only a portion of the premiums are tax deductible, and the general percentage is 67 percent.
Tax On Insurance Benefits
If TPD is held outside superannuation, the benefits are exempted from capital gains tax. However, if taken out inside a super fund, a part of it may become subject to tax. A portion of the benefit will not be taxed; the rest will be taxed based on how you wish to receive the benefit payout-monthly installments or as a lump sum.
Taking Out A TPD Cover
When taking out such a cover, the tax environment is an important factor to consider. However, you should not base your decision solely on this. Your aim should be to get an adequate cover.
Assess The Features
Generally, standalone policies will have more comprehensive plans and a wider range of benefits. Different insurance providers will have different policy features that are worth considering. The general rule of thumb is to look at several policy features to get the most ideal plan.
Kerrie Peacock researches on life insurance extensively in Australia. For more information and advice, log on to www.mecovered.com.au/tpd-insurance-deductibility.