Is life insurance tax deductible?

Are life insurance premiums tax deductible if you’re self-employed?

The rules around tax deduction for life insurance premiums may differ slightly for self-employed individuals. 

Personal life insurance: If your life insurance policy is for personal purposes, such as providing for your family in the event of your death, the premiums are not tax deductible. The general principle is that income related to loss of life or illness is exempt from taxation when directly received by individuals or estates, thus relieving beneficiaries of any tax obligations. 

Exceptions to this rule apply when the policy is owned by a trust or company rather than an individual. For the premiums to be tax deductible, the policy would need to be related to business activities. Under the Income Tax Act 2007, life insurance policies taken out by employers for employees will have their premiums paid by the employer. These premiums are subject to fringe benefit tax (FBT). They will also generally be tax deductible. 

Here’s a breakdown of situations where insurance premiums may be tax-deductible:

Key person insurance: According to the IRD⁵, if a business takes out life insurance to cover a key person, the business may be able to claim tax on the premiums. A key person is someone whose death would significantly affect the business’ operation. In this instance, life insurance is considered a legitimate business expense, designed to protect the company from the financial loss caused by the key person’s death, any payout is treated as taxable income by the IRD.

Business debt insurance: If your life insurance policy is tied to a business debt, such as a loan that the business has taken out, the premiums may be tax deductible. A debt protection policy can help ensure that the business’ financial obligations are met in the event of death or incapacitation of a business owner to safeguard the business. Cover will pay specified fixed business expenses for a set period if a small business owner, sole trader, or partner is unable to work more or their capacity is greatly reduced.

If you are self-employed, it’s crucial for you to carefully assess the purpose of a life insurance policy and ensure it meets the criteria for business-related deductions. You should seek independent advice from a tax professional for guidance on when life insurance can provide tax benefits.

Is GST charged on life insurance premiums?

In New Zealand, the Goods and Services Tax (GST) is generally not applicable to life insurance premiums. Life insurance is considered an exempt financial service under New Zealand’s GST rules. This means that when you pay premiums for your life insurance, there is no GST added to the cost. However, you can’t claim any GST on the premiums as you would any other business expense.

It is important to note that while life insurance premiums themselves are exempt from GST, other financial services related to life insurance⁶, such as financial advice or broker services, may have a GST component. If you’re receiving advice or engaging with a broker in relation to your life insurance policy, make sure to check whether GST applies to those services. Your financial advisor may be able to provide you with clarity on this matter.

GST is charged on premiums for some income protection policies. If you are GST-registered through the IRD⁷ and have an income protection insurance policy, you may be able to claim GST on your premiums.

Are life insurance payouts taxed?

The good news is that a personal life insurance policy payout is generally not taxable in New Zealand. This means that the lump sum payment your beneficiaries receive from your life insurance policy if you pass away will not be subject to tax. Your partner, children, grandchildren or whoever you nominate as your beneficiary, can use the funds however they choose – whether it’s covering the cost of your funeral, being able to retire comfortably, paying off debts or university fees, paying the mortgage, or maintaining their standard of living.

However, it's important to note that if the life insurance policy is owned by a business or a trust, different tax rules may apply. For example, if a business owns the policy and is the beneficiary, the payout might be subject to different tax. It’s always best to check with an accountant or another tax professional to ensure you clearly understand any tax obligations you may have.