Tax on trauma and TPD payouts

Trauma and TPD both pay a lump sum on a defined event, and for an individual who owns the cover on their own life the general treatment mirrors life insurance. The payment is a capital receipt — compensation for something that has happened to you rather than a substitute for income you would have earned — so it is not taxed as income. Correspondingly, the premiums are not deductible.

This is why the tax question is much quieter on trauma and TPD than on income protection. There is no structural choice to make and no deductible-premium option to weigh up. For personal cover, held personally, the position is generally clean.

It stops being clean the moment a business is involved, or an employer is paying. Then the question becomes what the cover is actually for, and the answer decides everything.

The dividing line in business insurance tax is the purpose of the cover. Is it protecting revenue — the profits the business would otherwise have earned — or is it protecting capital, such as funding a share purchase or repaying a term loan? Revenue purposes and capital purposes are treated differently, and the same policy type can fall either side depending on why it exists.

Documentation matters here more than people expect. Where a policy is intended for a capital purpose — funding a buy-sell agreement, for instance — the agreement, the ownership and the policy should all tell the same story. Where they do not, the treatment can end up being determined by what the paperwork actually shows rather than what everyone intended.

These are the details that decide whether the cover does what you expected. Read them before you compare on price.

• Whether the cover is genuinely personal or is business cover held in personal names for convenience.
• Whether an accelerated structure means a trauma payment reduces life cover, which is a benefit question rather than a tax one but affects the total picture.
• Whether the policy is owned by a trust, which brings the trust’s own tax position into play.
• Whether a shareholder or buy-sell agreement exists and whether the insurance matches it.
• Whether an employer is paying any part of the premium.
• That the position described here is general and your accountant’s view on your facts is the one that counts.

Every New Zealand insurer writes trauma and TPD cover to its own wording, and the words are where the money is. Two policies that look identical on price can pay very differently when it matters. Closing that gap is the entire job of an adviser.

• An adviser sets up ownership so it matches the purpose, which is what the tax analysis depends on.
• For business cover they will ask what the money is actually for before quoting, because that determines the structure.
• They can arrange separate policies where mixing purposes would muddy the treatment.
• They work alongside the accountant and solicitor rather than making the tax call themselves.

There are three ways to buy life cover in New Zealand, and they are not equivalent. You can buy direct from one insurer, which means you see one product range and one underwriting appetite. You can buy through your bank, which usually means a single insurer’s product sold under the bank’s brand, often with narrower definitions. Or you can go through an adviser, who quotes several insurers at once and is required to put your interests first.

The premium you pay is the same either way. Insurers build adviser commission into their pricing whether or not an adviser is involved, so going direct does not get you a discount — it just removes the person whose job is to argue your corner at application and at claim time.

• An adviser can see which insurer is currently taking your health history on standard terms, and which one will load or exclude it.
• An adviser can structure cover across two insurers if that produces a better outcome than putting everything with one.
• An adviser handles the underwriting back-and-forth, and is the person who chases the claim when a family is least able to.
• An adviser has to document why the recommendation suits you, which is a written record you can hold them to.

We are a referral service, not an insurer. We do not quote premiums and we do not sell policies. What we do is put you in front of one licensed New Zealand adviser who can compare the market properly.

1. 1

   You tell us what you are looking at

   The form takes about a minute. Nobody asks for your medical history on a web form — that conversation happens with the adviser, properly, and only once you have decided to proceed.

2. 2

   An adviser calls you

   A licensed New Zealand adviser talks through your situation: who depends on you, what you owe, what you already have in place, and what you are actually worried about.

3. 3

   They compare the market

   The adviser quotes across the major insurers, checks which of them will take your health history on the best terms, and puts the options side by side in writing.

4. 4

   You decide, in your own time

   There is no obligation and no cost to you. If the answer is that you already have enough cover, a good adviser will tell you that.