Centrelink Q&A: How are life insurance policies assessed?

Norma is worried her husband’s life insurance policy is robbing them of pension payouts.

Norma wants to know how Centrelink assesses the value of her husband’s life insurance policy and whether they would be better off without it.

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Q. Norma
My husband has been paying for a life insurance policy over the last 48 years. If he dies tomorrow, I will receive its value of $16,000 (which will just about cover funeral and other related expenses). If he decides to cash it in, he will receive approximately $11,000. If he just stops paying, he will lose it all. I would like to know just how Centrelink views this asset, which is costing us money.

A. While the main purpose of conventional life insurance policies is to provide death cover, some policies include an investment element which may pay bonuses to the investor. A person who invests in such a life insurance policy is seen as deriving income from a profit-making transaction and the money is included in the income test.

If you have a conventional life insurance policy, the surrender value of the policy is assessed as an asset ($11,000 in your husband’s case).

Upon withdrawal from a policy (whether by surrender or maturity), the assets test treatment depends on what is done with the money. For example, if it is used to purchase a motor vehicle, the value of the motor vehicle will be assessed as an asset. If it is used to pay off a mortgage on the principal home, it will not be assessed because the principal home is an exempt asset. If it is placed in a financial investment it will be assessed as a financial asset, and it will be treated under the income test deeming rules.

The precise effect of the withdrawal, and the use to which the money is put, depends on the circumstances of the individual. The withdrawal may result in a person’s assessment changing from the assets test to the income test and vice versa.

During its life, a conventional life insurance policy is not assessed as a financial investment, so it is not assessed under the income test deeming rules.

A death benefit is not assessed as income for the person nominated to receive the benefit. The assets test assessment will depend on how the money is used. For example, if it is used to pay out the mortgage on a principal home it becomes part of an exempt asset. If it is placed in a financial investment it will be assessed as a financial asset and it will be treated under the income test deeming rules.

For people who want to enquire about the impact of life insurance policies on their social security income support entitlement, Centrelink can be contacted on 13 2300.

If you have a Centrelink question, please send it to newsletters@yourlifechoices.com.au and we’ll do our best to answer it for you.

Are you eligible for an Age Pension? Do you know your rights? The PensionChecker™ tool has all the information you need.

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    Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a Centrelink Financial Information Services officer, financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.





    COMMENTS

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    8th Mar 2019
    11:30am
    It may be worthwhile looking at prepaid funerals as the question mentions funerals. A prepaid funeral is not counted as an asset by Centrelink and is a better system than funeral insurance, in my opinion.
    ozrog
    8th Mar 2019
    12:18pm
    I think you might find pre paid funerals are counted as an asset. You can get funerals much cheaper than $15,000.
    Also check expiry of life insuance as most will not cover you over a certain age even though you still keep paying for it.
    almost a grey hair
    8th Mar 2019
    12:29pm
    Prepaid funerals are not counted as an asset therefore exempt from assets test to the tune of $13,000 each .You can check this out on Centrelink site just type in prepaid funerals. The amount is indexed every year on the first of July
    nan
    8th Mar 2019
    12:56pm
    Yes, it would seem your damned if you do and damned if you don't. To me it seems very unfair.
    If you withdraw and the husband dies soon, after $5000 is lost. The insurance company wins. $9000 as an asset is losing $27 a fortnight pension. $702 a year plus the cost of the policy. So lets say $725 a year loss.
    nan
    8th Mar 2019
    1:01pm
    Sorry, I should have said $11.000. So $33 a fortnight.
    Anonymous
    8th Mar 2019
    1:03pm
    Just cash it in and spend it

    8th Mar 2019
    12:58pm
    I think its fair to include the surrender value as an asset. Imagine if the value was $1million, would anyone not agree that it is an asset - as good as cash in the bank
    nan
    8th Mar 2019
    1:15pm
    Lothario, After paying for 48 years, to me, its unfair. A person with a million dollar insurance would also lose thousands too on surrender. A bigger insurance policy would be costing a lot more to keep.
    Anonymous
    8th Mar 2019
    1:17pm
    What’s the difference to someone who invested the premiums instead an now has investments worth $11k or $1m ???
    Rae
    8th Mar 2019
    1:27pm
    Life isn't fair. I paid life insurance when my kids were dependent and then cashed it in when it wasn't needed anymore.

    Obviously these people have no money if they need this for a funeral. I can't see why you'd lose $33 a fortnight for having $11000 savings. Even with deeming at 3.25% that's bugger all income from investment. It's less than $35 annual interest.

    A friend has saved around $40 000 on the pension and it hasn't affected fortnightly payments at all.

    Insurance companies always win. I was quoted a payout around $80 000 on my policy and it ended up at $32 000 due to "market" conditions haha. Superannuation will be the same. I LOL when I see the predicted lump sums. No way will they ever achieve those figures. It only works because we are gullible and hope too much.
    nan
    8th Mar 2019
    2:01pm
    Rau, She didn't actually say it was needed it for funeral. We can presume it was bought originally to cover the possible death of the husband. The surrender value is $11.000. It is counted by centrelink as an asset, so 11.000 x 3 is $33. That means the couple lose $33 a fortnight from the pension. If she banks the money they still lose the $33. If the husband died tomorrow she would receive $16.000 plus cash. She must still keep paying premiums or lose it all. i guess she was just looking for some ideas. I expect many other people find themselves in the same position.
    leek
    9th Mar 2019
    12:21pm
    so you lose everything is you stop putting money into it, what sort of an investment is this??? gee there are gullible people around. What a scam!!
    nan
    9th Mar 2019
    1:21pm
    Leek. There are many insurance systems like that. But this one is not the same. She can just withdraw the money but straight away loses $5000 after paying for 48 years.
    McDaddy
    10th Mar 2019
    2:45pm
    The above answer is incorrect, if the Policy is cashed in, the surrender value is assessed as Income for 12 months. This is regardless of whether the money is used to purchase a car or pay off the mortgage etc.
    nan
    10th Mar 2019
    2:54pm
    macdaddy. So if she cashes it in and her husband dies shortly after, will it still counted as income? How can that be? Its a lump sum.
    McDaddy
    10th Mar 2019
    5:38pm
    Yes Nan, it's counted as Income over 12 months from the date it is surrendered "cashed in". It's just a quirkiness of those types of policies.