Life insurance can offer a sense of financial security in the event of an unexpected tragedy, like a terminal illness diagnosis or death. While life insurance can be valuable in safeguarding your family’s financial future, there are often questions about how it can impact your taxes.
Here’s a brief overview of the tax implications of life insurance in New Zealand, focusing on life insurance premiums, GST, and whether there are tax-deductible contributions.
Generally personal life insurance premiums are not tax deductible in New Zealand for policyholders. This includes premiums paid for both personal (single) life insurance policies, as well as for policies purchased for family protection (joint cover).
The Inland Revenue Department2 (IRD) in New Zealand doesn’t offer provisions for Kiwis to deduct the cost of life insurance premiums from their taxable income. This is because life insurance is primarily a personal financial protection product and therefore considered a personal expense. Tax deductions3 are usually reserved for expenses related to earning money, in other words, a work-related expense.
For example, income protection insurance premiums may be tax deductible4 because they’re considered a work-related expense, since the policyholder is paying monthly amounts to protect their ability to earn a living, whether they are employed or self-employed. On the other hand, any payouts you receive as the policyholder can also be taxable as it’s replacing your lost income, according to the IRD4.
Learn more: How does life insurance work?
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.
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.
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.
While life insurance premiums are generally not tax deductible for individuals, there are cases where other parties can make tax-deductible contributions. Here are a few scenarios where third parties may be able to make tax-deductible contributions:
Employers: If your employer takes out employee life insurance8 as part of an employee benefit package, they may be able to deduct premiums as a business expense. However, these premiums can be subject to fringe benefit tax9 (FBT) and may be considered a taxable benefit for the employee.
You should consult a tax professional to get a better understanding of tax rules and implications that may apply to your unique situation in relation to a life insurance policy.
With New Zealand Seniors, you can tailor your policy to suit your individual needs and budget. Choose the level of cover you need, and rest assured knowing you’re backed by a respected and award-winning insurer.
Choose how much you or your family receive if you pass away or become terminally ill. You can set a benefit amount from $10,000 up to $200,000.
Simply answer eight questions about your medical history over the phone. Once approved, you can get covered in minutes.
Once your policy is set up, you’ll be covered straight away for death by any cause, and for terminal illness1 (excluding suicide for the first 13 months).
When your family makes a claim, 20% of the benefit amount may be paid in advance, so they won’t have to worry about the cost of your funeral or other immediate expenses.
Your family’s benefit amount will be tripled if you pass away from an accident, helping with any last-minute expenses they might face.
If you or your family need to make a claim, we’ll assign you a dedicated claims specialist to look after everything. No need to explain things to multiple people.
Unlike some life insurance policies, your annual premium increase won’t be based on your age which will help with budgeting later in life. Plus, we offer lower starting premiums for non-smokers.
We know that the older you get, the more you have to protect, so Seniors Life Insurance allows you to apply from age 45 to 79, protecting you and your family until you turn 85.
If you’re a New Zealand resident aged 45 to 79, the process is quite simple:
Answer eight questions about your health and we’ll get you a quote in minutes.
Tailor your policy and choose the level of cover you need.
Rest easy knowing the people you care about most are in safe hands.
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