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 past 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 that 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 will be treated under the income test deeming rules.
For people who want to inquire 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 [email protected] and we’ll do our best to answer it for you.
Do you have a life insurance policy? Are you considering cashing it in? Why not share your experience in the comments section below?
Also read: How does Centrelink assess gambling income?
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.
Another rule that makes having an OAP so complicated. The government needs a huge revamp of the whole OAP to make it simpler. Basically scrap the current broken and overly complex system which no-one understand and replace it with a universal pension at age 65 that isn’t asset or income tested. This would save $billions in admin fees alone.
Pensioners will then be taxed (OAP excluded) on all income. Super will no longer be tax exempt from earnings. This would be fair and those still working or earning huge amounts through tax exempt super would be paying their fair share of taxes. This tax would then help pay for the OAP along with the admin savings.
Simple system that would be harder to rort.
I contacted the ALP years ago and it wasn’t on the agenda to discuss. The LNP, forget them. We know how they treat anyone on the OAP.