If you or your family find yourself claiming on your life insurance policy, you've had some bad news. However, this is why you decided to take out a policy in the first place – to help put food on the table, pay the bills, and support the loved ones you leave behind in any way you can.
One of the most common questions we get asked at Pinnacle Life is, "do I have to pay tax on a life insurance claim payout?". The good news is that the answer is no, as long as the owner is a person. In New Zealand, you don't pay tax on life insurance payments you or your estate receive– so you can calculate the exact amount of cover you need with the added comfort of knowing you'll receive the full amount at a time that is already stressful. In other words, payments related to Life Cover and any Critical Illness benefits are tax-free.
The only time this isn't the case is when the policy owner isn't a person but a trust, company, or investment; then, the tax rules get more complicated. Any earnings on that investment may be subject to tax. As with any financial matter, consulting with a tax professional or financial advisor is always important to ensure you fully understand any tax implications related to your life insurance policy.
What about Income Protection?
Although Life Insurance claims are not taxed, this is not the case for income protection policies. Income protection insurance provides regular payments to a policyholder if they are unable to work due to an illness or injury. These payments are intended to replace lost income and are therefore considered a form of income for the policyholder. Any payments received from an income protection policy are subject to income tax. In contrast, life insurance provides a lump sum payment to a policyholder's beneficiaries in the event of their death. Because the payout is not intended to replace lost income, it is not considered income for the beneficiaries and is, therefore, not subject to income tax.
Do I have to pay taxes on my premiums?
This, again, depends on the type of insurance. When it comes to life insurance premiums, no GST is added to your premium. However, there is GST on our other products, such as income protection, critical illness, and disability cover. This is because these types of insurance are considered to provide benefits to policyholders in an unforeseen event, such as an accident or illness, and are therefore considered goods or services. Life Insurance is treated differently because it is considered a 'financial product'.
If you are thinking of taking out a policy, why not start your journey with us today and calculate your own quote or try out our digital advice tool to help guide you in the right direction if you want to learn more about what is right for you!
