Mixed Adviser Messages on Tax-Deductible Life Insurance

The ‘carrot’ option is the big winner in our latest adviser poll on the future prospect of tax-deductible life insurance premiums, but advisers have also sent a warning about unintended consequences.

As we go to print, 73% of advisers taking our poll prefer the ‘carrot’ incentive that consumers should be able to access a tax deduction on their life insurance premiums.  Only 19% of respondents prefer the ‘stick’ disincentive option of the Government applying an additional tax levy on eligible consumers who don’t hold a minimum level of life insurance cover.  The third option of paying for the cost of all life insurance premiums out of superannuation accounts failed to generate adviser support.

While the carrot option is the clear winner in this adviser poll, its very nature has also generated warnings from several advisers about the consequences of such a move.  These warnings mostly relate to the notion that if life insurance premiums are made tax deductible, then the insured benefit, if or when paid out, will then become subject to taxation.  In this vein, long-standing adviser and riskinfo contributor, Bill Brown commented:

Death duties by another name

“Who thinks that a tax deduction for non-super life cover WILL NOT result in the ATO taxing the benefit. Death duties by another name…”

Mr Brown’s comments were reinforced by other advisers who also saw a possible future where all life insurance proceeds could then be subject to tax, which was seen to negate the value of the premium tax deduction.

There were also arguments that applying tax deductions to life insurance premiums would create greater levels of complexity to the life insurance conversation in Australia: “Simplicity is needed – not even more complexity”, said one adviser.

Other advisers have suggested that any possible future tax deductions on life insurance premiums should be capped, in order to remove an open-ended premium deduction claim, while another comment we received suggested there would be greater value in securing a tax deduction for the cost of financial advice, rather than on risk premiums:

“I think the better option would be tax deductible financial advice up to a certain limit. This will allow consumers to seek advice and no doubt insurance will be a large part of that advice but will also allow people to get access to good advice in other finance areas.”

Where do you stand on this question?  Given the Government’s stated intention to rein in spending, there is little likelihood that life insurance premiums will attract a tax deduction in the near future.  But this does remain a well-supported future option by many industry stakeholders.  Do you support it?  What about the less popular, but still viable ‘stick’ option of extra levies on eligible tax payers who don’t have a minimum cover level?  It seems to have worked well within the health insurance sector…

As always, tell us what you think, as our poll remains open for another week…