Taxes on your life insurance
Life insurance and income protection policies are very popular. However, the implications of a claim for taxes and other government benefits are sometimes overlooked.
Taxes devolution
The premium you pay for “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 receiving a salary. If you were to make a claim on “income protection insurance”, you will generally receive 75% of your pre-disability income paid to you monthly, before taxes. However, keep in mind that if you receive sickness benefit or ACC, your claim amount will most likely be reduced. This may not be the case with mortgage repayment insurance.
Lower your ACC rate
ACC covers you for lost income and medical expenses from an accident. Many people decide they want health coverage too, so buy income protection insurance. This means that in many cases coverage for an accident is doubled. However, if you are self-employed, you can lower your ACC rates by using ACC’s “Plus Coverage”. This allows you to set a lower amount of ACC coverage for a lower tax, which is useful if you know that you will be covered by your own income protection insurance anyway.
Do I pay taxes on my life insurance?
Taking out life coverage on behalf of your business may seem great for tax deduction from premiums, but this likely means that the business will also pay taxes on any claims that arise. This can end up being a lot of money and can mean that you need a lot more coverage to do the same job. To avoid this, it may be cheaper to purchase a lesser amount of non-tax deductible coverage in your personal name. When taking income protection for a business, it is also important to consider the type of income proof that may be required when and if you may need to file a claim. Indemnity-type policies require proof of income at the time of claim, which can be challenging for many self-employed. You can look for an agreed-upon type of coverage or business overhead insurance to avoid this challenge.
Fringe benefits tax
If you own a business and manage your personal insurance through the business as expenses, you will likely have to pay fringe income tax. It is important to check how much this could be with your accountant.
In summary, the key points to remember are:
– Income protection insurance is tax deductible even if you have a salary
– The extra ACC plus holster can be a good way to avoid holster duplication in case of accidents
– Any claim on business-owned insurance may also be taxable.
Ask your accountant about the implications of your insurance structure or find a good insurance broker who can communicate directly with your accountant.