[Tax] "10-year rule" tax-free for life insurance policies?

Are you holding a life insurance policy with an investment or savings component that is tax-free over 10 years?

Well, yes, but it is often misunderstood because it depends on specific circumstances. The tax rule governing this is section 26AH of the ITAA 1936, which is quite complex.

This article is not intended to go into depth but highlights a few factors for you to consider.

The "10-year rule" applies only to certain life insurance policies with an investment or savings component (such as whole-of-life, endowment policies, and many investment-linked life policies). Therefore, if an eligible policy is surrendered or matures after being held for more than 10 years, the investment gain is generally not included in the policyholder's assessable income under s.26AH. However, it does not apply to pure term life insurance because it has no investment value, so the 10-year rule is generally irrelevant.

Some products are commonly marketed as having a '10-year tax-free rule '. In practice, the earnings have already been taxed inside the life insurance company and therefore the withdrawals after 10 years are generally not assessable to the investor.

Section 26AH does not subject to tax amounts received under a policy of life assurance where the amount is received as a result of the death of, or an accident, illness or other disability suffered by, the person on whose life the policy was effected. Receipts arising from policies that are part of an exempt superannuation fund or scheme are also outside the scope of the section. Therefore, for death benefits paid to the beneficiary under a life insurance policy, they are generally not taxable anyway, no matter how long the policy has been held.

Reference: s.26AH of the ITAA1936, IT 2346 Income tax : bonuses paid on certain life assurance policies - section 26AH - interpretation and operation