Assessing Life Insurance Policies

Definition of life insurance policies

The following are assessed as life insurance policies:

• conventional life insurance policies,
• whole of life insurance policies,
• endowment insurance policies, and
• pure endowment insurance policies.

These products have an investment component and may have a surrender value. Whereas, products such as term insurance, trauma insurance, total and permanent disablement insurance, income protection insurance and business insurance cover do not have an investment component or surrender value.

Assessing a life insurance policy

A life insurance policy is an assessable asset of a person if the person:

• owns the policy,
• is the policy holder, or
• has access to the value of the policy, even if it is for the benefit of their partner or children.    
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  9.5.6/Income from Life Insurance Products – Conventional Policies

   

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During the term of the policy, a life insurance policy is an asset (but not a financial asset at this stage) and is prima facie assessable only under the assets test. It remains an asset until such point as it is withdrawn (via surrender or maturity). At this point the difference between the surrender/maturity value and the sum of the purchase price and the premiums paid over the life of the policy would be held as income over 12 months.

Where a life insurance policy is transferred to a third party (commonly a child), the life insurance policy will become a deprived asset, and, subsequently, a financial asset (per the definition in s5J(1) of the VEA). It would then be deemed appropriately.

Assessable value of a life insurance policy

The assessable value of a person's life assurance or insurance policy is the surrender value of the policy UNLESS:

• the person became the owner of the policy after 30 June 2019, AND
• the person became the owner of the policy after the person reached pension age, AND
• the sum of the amounts paid for the policy in any 12 month period exceeds 15 per cent of the maximum death benefit that would be payable if the person died on the day of assessment.

In this situation, the value of the life insurance policy is the higher of:

• the surrender value of the policy, OR
• the sum of the amounts paid to purchase the policy, less any commuted amounts.

VEA: section 52CB.

If the person or their insurance company cannot provide the value of the policy, the following formula is used to estimate the surrender value of the policy.

Assessable value = number of years that the person has had the policy X annual premiums paid.

If the estimated surrender value will affect or is likely to affect the person's rate of payment, the person must obtain the actual surrender value from their friendly society or insurance company.