If you become sick or injured and are unable to work, income protection insurance can provide you with up to 70% of your regular monthly income. This means you can focus on your recovery without stressing about a loss of income. In many cases, income protection premiums may be tax deductible.
Learn how tax deductions for Australian income protection premiums work.
Is income protection insurance tax deductible in Australia?
Income protection premiums you have paid during the applicable tax year may be tax deductible where the benefits paid replace lost income and you purchased your policy directly through your insurer (that is, your policy isn’t held through a super fund).
If your income protection policy is set up through your superannuation fund, you won’t be able to claim a tax deduction on your premiums. This is because insurance through super is technically owned by your super fund. With insurance through super, you pay for your premiums indirectly: you add money to your super balance (whether through personal or employer contributions) and your super fund deducts the cost of your premiums for any insurance you hold. While tax deductions aren’t available on income protection in super, you have the option to claim a deduction on personal contributions made to super instead. Keep in mind that there are limits on the amounts you can contribute to super and how much you can claim tax deductions on. You should consider obtaining advice from a registered tax agent if you’re not sure about your super contribution limits or need further information about your tax deductions.
If your income protection cover is part of a bundled policy (a single policy with various cover types bundled within it, like life insurance, total and permanent disability, and critical illness) you will only be able to claim a tax deduction on the portion of your premium that pays for the income protection where the benefits paid replace lost income. For example, say you’re paying $270 a month for a combined income protection and trauma policy. In this case, $170 of your premium may be for the income protection and $100 is for trauma. So, you may only be able to claim a tax deduction on $170 a month.
How to claim income protection tax deductions
You may claim a tax deduction on your income protection premiums where the benefits paid replace lost income when you complete your tax return for the financial year. You may like to obtain advice from a registered tax agent if you need help with this, especially if your insurance is bundled.
Are income protection benefit payments taxable?
If you become too ill or injured to work and make a successful claim on your income protection policy, the benefit payments you receive are generally considered part of your taxable income. If you purchased your policy directly through your insurer, generally your insurer won’t deduct tax from your benefit payments. You’ll need to declare the payments as income when you complete your tax return. This means that you may have to pay a portion of the benefits received to the Australian Taxation Office (ATO) at tax time.
If your income protection policy is set up through your superannuation fund, the insurer or the superannuation fund is required to withhold tax from benefit payments paid to the claimant who is not the policyholder. The tax will be forwarded to the ATO, and the payer will provide a payment summary which includes the benefit payments and tax withheld information to complete your tax return.
*Lifebroker only provides general advice, which means we haven’t considered your individual financial situation, objectives or needs. Before acting on it, please consider the appropriateness of the advice, having regard to these factors. Before making a decision to purchase or continue to hold a life insurance product, you should read the relevant Product Disclosure Statement (PDS). The PDS includes the details of the product issuer. The Target Market Determination for each product is also available.
INFORMATION PROVIDED IN RESPECT OF TAXATION LAW IS GIVEN IN GOOD FAITH AND FOR THE GENERAL INFORMATION PURPOSES OF AUSTRALIAN TAX RESIDENTS ONLY. IT IS BELIEVED TO BE ACCURATE AS AT 08 MARCH 2023 BUT MAY BE SUBJECT TO CHANGE. LIFEBROKER IS NOT LIABLE FOR ANY LOSSES THAT MAY ARISE FROM RELIANCE ON THIS INFORMATION. LIFEBROKER DOES NOT GIVE, AND DOES NOT PURPORT TO GIVE, ANY TAX ADVICE. AS THE APPLICATION OF TAX LAW DEPENDS ON EACH PERSON’S INDIVIDUAL CIRCUMSTANCES, YOU SHOULD ALWAYS SEEK ADVICE FROM A QUALIFIED TAX PROFESSIONAL.
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Frequently asked questions
Income protection is insurance that pays up to 70% of your regular monthly income if you’re too sick or injured to work. How would you pay for your living expenses if you were suddenly too unwell to work? Without a regular income, would you be able to pay for groceries, bills, rent or mortgage repayments? This is why people take out income protection — it’s a safety net that allows you to keep up your living expenses while focusing on recovering.
You can use our comparison tool to check out which income protection policy might suit your needs.
Income protection is designed to support you financially if you become too sick or injured to work. You might consider getting income protection if you’re not sure how you’d pay for things like bills and groceries without your regular income. You can seek professional advice if you’re unsure whether income protection is the right choice for you.
Income protection premiums you have paid during the applicable tax year may be tax deductible where the benefits paid replace lost income and you purchased your policy directly through your insurer (that is, your policy isn’t held through a super fund).
A registered tax agent can help you crunch the numbers on how much you can claim.
You won’t be able to claim a tax deduction on income protection premiums if your policy is held within your super account.
If your income protection is bundled with other types of cover — like life, total and permanent disability, or critical illness — you may only be able to claim a deduction on the portion of your premium that pays for the income protection.
You may claim a tax deduction for income protection premiums you have paid during the applicable tax year where the benefits paid replace lost income when you complete your tax return.
Yes — if you make a claim on your income protection and start receiving payments, you will need to declare them to the ATO on your tax return. Payouts are generally taxed at your marginal tax rate.
If you purchased your policy directly through your insurer, generally your insurer won’t deduct tax from your benefit payments. You’ll need to declare the payments as income when you complete your tax return.
If your income protection policy is set up through your superannuation fund, the insurer or superannuation fund is required to withhold tax from benefit payments paid to the claimant who is not the policyholder. The tax will be forwarded to the ATO, and the payer will provide a payment summary which includes the benefit payments and tax withheld information to complete your tax return.
Income protection premiums you have paid during the applicable tax year may be tax deductible where the benefits paid replace lost income and you purchased your policy directly through your insurer.
The benefit payments you receive are generally considered part of your taxable income and taxed at your marginal rate.
When the income protection policy is held within a self-managed super fund (SMSF), the income protection premiums paid by the SMSF may be tax deductible for the SMSF.
You won’t pay GST on income protection premiums because income protection is classified as a ‘financial supply’.
Health insurance and income protection are not the same
• Health insurance helps cover the cost of medical care. Depending on your policy, health insurance can include cover for surgical expenses and emergency healthcare, as well as extras like dental and optical.
• Income protection covers up to 70% of your income so you can continue to meet your everyday living expenses when you’re too ill or injured to work.
The key difference here is that you can spend your income protection benefit payments in any way you like. For example, you could use your payments to cover the bills and groceries, school fees or even takeaway food — it’s your money to spend as you please. On the other hand, health insurance is directly linked to the cost of your medical treatment and services. It’s not uncommon for people to have both types of insurance so they have backup for medical costs and for general living expenses. If you’re not sure whether you need insurance or what type of insurance may suit you best, consider obtaining professional advice.