Life Insurance And Stamp Duty: What's The Connection?

Life insurance is a financial safety net that provides peace of mind and financial protection for individuals and their loved ones. It is a contract between an insurance company and the policyholder, where the insurer promises to pay a designated beneficiary a sum of money upon the insured's death. While life insurance is designed to provide financial security, it can also come with additional costs in the form of stamp duty. Stamp duty, or insurance duty, is a tax levied on the premium paid to establish an insurance policy. The existence and amount of stamp duty on life insurance vary depending on location and the specifics of the policy. This paragraph aims to explore the topic of stamp duty on life insurance, shedding light on the potential costs associated with this important financial protection tool.

Life insurance duty abolished in 2014

Life insurance duty was abolished in Victoria, Australia, on 1 July 2014, following the Building a Better Victoria (State Tax and other Legislation Amendment) Act 2014. This change was one of several made by the Act, which also included amendments to the Duties Act 2000, clarifying when life insurance policy riders are subject to insurance duty.

Prior to the abolition, duty was payable on the premiums paid in respect of life insurance policies. Life insurance is defined as any insurance or assurance in respect of an event or contingency relating to or depending on a life or lives of a person who resides in Victoria at the time the insurance policy is issued. A life insurer is a person or entity that writes life insurance and is authorised to carry on insurance business under the Life Insurance Act 1995 (Commonwealth). Only these authorised entities can sell life insurance policies.

Following the abolition, life insurers in Victoria are no longer required to pay duty on the premiums they collect for life insurance policies. This change reduces the cost burden on life insurers and may result in more affordable life insurance options for consumers.

It is important to note that while duty on life insurance has been abolished, there may still be instances where duty is payable. For example, if a rider (additional insurance) is attached to a life insurance policy, duty may still be charged based on the cost of the additional insurance.

Who pays insurance duty?

In Queensland, insurance duty is charged on the premium (the total amount paid to the insurance company for the insurance) and GST, which is considered part of the premium. The duty rate varies depending on the type of insurance. For instance, the duty rate for Class 1 and Class 2 general insurance is 9% of the premium paid, while for CTP insurance, it is 10 cents on the premium. In the case of temporary or term life insurance, the duty is 5% of the first year's premium.

In Victoria, when you buy an insurance policy, you generally pay duty as part of your premium. The insurer is charged a 10% duty, which is usually passed on to the customer. From 1 July 2024, duty on certain business insurance premiums will be phased out over a decade. While life insurance duty was abolished on 1 July 2014, additional insurance attached to a life insurance policy may still be subject to duty.

In New South Wales, insurance duty is calculated based on the premium paid to obtain insurance. Typically, the insurer is responsible for paying the insurance duty. If the premium is paid to an unregistered insurer, it is treated the same as if it were paid to a registered insurer, and insurance duty is still owed on that premium, with the insured person being responsible for payment.

Insurance duty exemptions

In the Australian state of Victoria, life insurance duty was abolished on 1 July 2014. However, duty may still be payable if a rider (additional insurance) is attached to a life insurance policy. In such cases, the duty is calculated based on the cost of the additional insurance.

In the state of New South Wales (NSW), there are several insurance duty exemptions, including:

• Insurance taken out by or on behalf of certain organisations, small businesses, and trustees.
• Non-profit and charitable organisations with patriotic, philanthropic, benevolent, or charitable purposes.
• Crop and livestock insurance (since 1 January 2018).
• Lenders mortgage insurance (for policies where the premium was paid on or after 1 July 2017).
• Policies of life insurance that are group superannuation investment policies, owned by the trustee of a superannuation plan.
• Insurance covering property of the Crown located in NSW.
• Insurance for hospital or medical benefits, workers' compensation, compulsory third-party motor vehicle insurance, and redundancy insurance for housing loans (where the sum insured does not exceed $124,000).
• Reinsurance—a contract between two parties where one party indemnifies the other against liability or payment under an insurance or reinsurance contract.
• Insurance for goods and merchandise (or their freight) carried by land, sea, or air.
• Insurance for the physical hull of a floating vessel used primarily for commercial purposes.
• Insurance for crops being grown, harvested, or stored, and agricultural machinery (since 1 July 2017).

For small businesses in NSW with less than $2 million in turnover, certain types of insurance are exempt from stamp duty, including commercial vehicle insurance, occupational indemnity insurance, and product and public liability insurance. Eligible small businesses must declare their eligibility to receive the exemption.

Calculating insurance duty

Insurance duty is calculated based on the premium paid to establish insurance. The insurer is usually responsible for paying the insurance duty, although the cost may be passed on to the insured. The duty is payable on premiums paid with respect to life insurance policies.

In the state of Victoria, Australia, life insurance duty was abolished on 1 July 2014. However, if a rider (additional insurance) is attached to a life insurance policy, duty may still be payable and is calculated based on the cost of the additional insurance.

In Queensland, Australia, different rates of insurance duty apply based on the type of insurance. For temporary or term life insurance, the duty is 5% of the first year's premium. For other life insurance contracts, the duty is calculated as follows:

• For a sum insured up to $2,000, the duty is 0.05% of the sum insured.
• For a sum insured over $2,000, the duty is 0.05% of the first $2,000, plus 0.1% of the remaining balance.

In New South Wales, Australia, the rate of duty for life insurance policies (other than temporary or term insurance, or trauma or disability insurance) is $1 for the first $2,000, or part thereof, of the sum insured, plus 20 cents for every $200, or part thereof, over the first $2,000. For temporary or term insurance policies, the duty is 5% of the first year's premium.

It is important to note that the information provided here may not be up-to-date and is specific to certain regions in Australia. The calculation of insurance duty can vary depending on the region and the specific type of insurance policy. It is always advisable to refer to the relevant government websites or consult with a financial advisor for the most accurate and current information.

Life insurance riders

While some riders increase the cost of your life insurance premium, others are included at no extra charge. The availability of riders depends on your insurer and the policy you've chosen. Riders are usually added when purchasing life insurance, and they cannot always be added later.

• Accelerated Death Benefit Rider: This rider allows you to access part or all of the policy's death benefit while you're still alive if you have a terminal illness. This rider typically comes at no additional cost, but there may be a fee to access the benefit. Any payouts will be subtracted from the total death benefit once you pass away.
• Accidental Death Rider: This rider increases the payout to your beneficiaries if your death is caused by a covered accident. It is sometimes called a "double indemnity" rider as it can double the amount received by beneficiaries. This rider usually comes at an extra cost.
• Child Term Rider: This rider covers your children on your policy and pays a small death benefit if a child dies before reaching a specified age. It is often tied to the legal guardian's policy.
• Guaranteed Insurability Rider: This rider allows you to purchase additional life insurance coverage in the future without the need for further medical examinations or health questionnaires. It is beneficial when there are significant changes in your life circumstances, such as having a child or getting married.
• Long-Term Care Rider: This rider lets you access your life insurance death benefit while you're still alive if you have a chronic illness and need assistance with daily living tasks. There are two types: reimbursement riders and indemnity riders. Reimbursement riders pay you back for long-term care expenses up to a monthly limit, while indemnity riders provide a predetermined monthly benefit.
• Return-of-Premium Rider: This rider refunds some or all of your premium payments if you outlive your term life insurance policy. It is typically available for term life insurance policies and can be added to new or existing policies. However, it significantly increases the cost of your premium.
• Waiver of Premium Rider: This rider waives future premiums if you become permanently disabled or lose your income due to injury or illness before a specified age. It is valuable when the premium on the policy is high.

Other less common riders include chronic illness riders, cost-of-living riders, critical illness riders, disability income riders, family income benefit riders, guaranteed renewability riders, paid-up additions, spousal insurance riders, and term conversion riders.

Frequently asked questions