Term life insurance payouts are generally not taxable if the benefit is paid directly to your spouse or a financially dependent beneficiary, as defined by the Income Tax Assessment Act 1997. However, there are specific situations where the beneficiary might face tax implications:
- Delayed Payout: If the death benefit is withheld for a period after the insured’s death, the beneficiary may be taxed on any interest earned during this time.
- Non-Dependent Beneficiaries: If the beneficiary is not financially dependent—such as children over 18 years old—tax obligations may arise.
- Third-Party Ownership: If the policy is owned by a third party or a business, tax consequences may apply.
Cashing In a Term Life Insurance Policy
In Australia, you cannot cash in a term life insurance policy. While it was once possible to withdraw up to 15% of the policy’s value, this option is no longer available.
Considerations Before Cancelling Your Policy
Before deciding to cancel your term life insurance policy, consider the following factors:
- Adjust Your Policy: Explore adjustments to reduce your premiums while maintaining adequate coverage. For example, quitting smoking or removing unnecessary add-ons may help lower costs. Additionally, inquire if you can switch from a stepped premium to level premiums.
- Compare Policies: Look for more affordable life insurance options by comparing policies from leading Australian life insurance companies.
- Complete a Thorough Medical Examination: Before cancelling your policy, it is crucial to undergo a comprehensive medical examination. This is because once your policy is cancelled, you may face challenges if you wish to reinstate it in the future. Health conditions that develop after cancellation might prevent you from obtaining new coverage or result in higher premiums due to your altered health status. A thorough examination can help you assess potential health risks and ensure you are fully informed before making a decision that could impact your insurance options and costs in the future.
By considering these factors, you can make well-informed decisions about your term life insurance, ensuring that it aligns with your current and future needs.
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Author Profile: Jeffrey Liu, JP, is the founder and principal adviser of Hippo Insurance (aka: Hippo Wealth), with a deep expertise in wealth protection. His extensive experience includes roles in the wealth management divisions of Westpac, ANZ, and a local multi-family office. As the host of “Riches Talk,” a podcast dedicated to cultivating personal and business growth, Jeffrey has established himself as a thought leader in developing life riches. His insights have been featured on SBS, The Australian, and Channel 7. Notably, he was a semi-finalist on Australia’s Got Talent in 2010. Learn more at http://www.hippoinsurance.com.au
