Does Centrelink treat insurance bonuses as income?

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Brendan wants to know how Centrelink will assess bonuses from his life insurance policy.


Q. Brendan
The taxation legislation doesn’t apply to bonuses from insurance policies commenced before 28 August 1982, which means that they are tax-free and not treated as ordinary income. Are these same bonuses treated as income by the social security legislation? Or are they excluded and not treated as income like a superannuation fund or an approved deposit fund or deferred annuity?

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 (profit on life insurance) to the investor. Centrelink considers a person who invests in such a life insurance policy as deriving income from a profit-making transaction.

According to the Department of Social Services, to ignore the income from life insurance policies for income test purposes would be:

  • inequitable compared with the treatment of other products; and
  • inconsistent with the intention of the Social Security Act 1991 to assess income from all sources, with very limited exemptions. The income test is used to target income support to people at times of financial need while ensuring that the social security safety net remains sustainable for Australian taxpayers.

If you have a conventional life insurance policy, during the term of the policy bonuses are not assessed as income, the surrender value of the policy is assessed as an asset, and the asset value of the policy is reduced by the amount of the encumbrance if the customer borrows against the policy.

Upon withdrawal from a policy (whether by surrender or when the policy reaches the maturity date first specified for the policy):

  • the difference between the surrender/maturity value; and the sum of the purchase price (if any) and the premiums paid by the investor over the life of the product is held as income over 12 months (under the income test)
  • the assets test treatment depends on what is done with the money. For example, if the money is used to purchase a motor vehicle, the value of the motor vehicle will be assessed as an asset of the person. If the money 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 the money 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 balance remaining with the insurance company is then treated in the same way as any other financial asset and is assessed under the income test deeming rules.

Prior to 21 July 1997, bonuses on conventional life insurance policies were not assessed as income. After 21 July 1997, the income testing of policies at surrender or maturity changed as a result of a clarification of policy to ensure that there was no misinterpretation of the Social Security Act 1991.

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.


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Written by Ben


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