Is Income Protection Insurance Tax Deductible?

Tax Deductible

If you are holding an income protection insurance policy, you may be wondering whether the premiums you pay are tax deductible.

This type of insurance provides a percentage of your income on a monthly basis for a given period if you cannot work as a result of illness or injury.

Generally the Australian Taxation Office (ATO) approves tax deductions for insurance premiums if you can prove they are related to the generation of assessable income. This means that income protection insurance is it tax deductible.

Tax deductibility rules

Although premiums paid for income protection are tax deductible, you may not be able to enjoy full tax deductibility if your policy comes with lump sum coverage for permanent disability or death – that portion of your premiums would not be tax deductible. If this is the case, you should ask your insurer how much of the insurance you could possibly claim under income protection tax deductions. If you are unable to determine the portion that is under income protection, you would not be able to claim any tax deduction. In addition, you should consider whether it would be more tax-efficient to hold your income protection insurance on its own instead of bundling you policies.

The tax deductibility of income protection insurance premiums applies whether you obtain coverage through a retail policy from an insurance company or superannuation. According to the ATO, the premium paid for income protection insurance results in an income benefit, which is why a deduction is allowed. This is also the reason why a tax deduction is not allowed on the premiums for life insurance, TPD insurance or trauma insurance. However, since the benefits are considered an income, they would be subject to tax at marginal tax rates.

Premium rates

Income protection insurance cover can be more expensive than life insurance. The premiums on this type of coverage vary based on certain factors including your age, gender, whether you smoke and the nature of your occupation. Higher premiums are charge for older policy buyers, men, smokers and people in manual based jobs who are more prone to injury and illness that could lead to temporary inability to work.

Your income protection insurance premiums will also vary based on the waiting period you choose, the benefit period, the type of policy (agreed value or indemnity) and any extra benefits attached to your policy. Longer waiting periods and shorter benefit periods make for cheaper premium rates, while agreed value policies are typically more expensive than policies that provide an indemnity value as benefits. Read: How To Calculate Mortgage Interest

Note that if you visit our website for your income protection insurance premiums needs, you would also have to declare any benefits you get when you make a successful claim against your insurance. Failing to do so could lead to tax law problems for you in the future. If your insurer is unable to help you determine the tax deductible portion of your premiums, you could also get in touch with the ATO, your tax consultant or financial planner. You will also require expert advice to fully understand all the tax implications of your policy within or outside super.