Is Income Protection Insurance Tax Deductible?

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What is income protection insurance?

Is income protection insurance tax deductible?

What tax deductions can you claim for income protection insurance?

What if your income protection insurance is bundled with other policies?

Does income protection insurance include GST?

What should I consider when claiming income protection on tax?

How do I qualify for an income protection tax deduction?

Where can I find and compare income protection?

Long story short

Income protection premiums and benefits attract different tax treatment

While income protection insurance premiums are often tax-deductible, any income you receive from an income protection payout must be declared as taxable income.

Only the income protection portion of a bundled policy is tax deductible

If your income protection is bundled with other insurance policies like life insurance, you can only claim a deduction on the income protection premium.

Income protection held within super is treated differently

If your premiums are paid through super, the super fund claims the tax deduction, rather than the individual policyholder.

What is income protection insurance?

For most people, the items that first spring to mind when they think of insurance are valuable assets, like your house, car or boat. But have you ever considered protecting your income? If you become sick or injured and you’re unable to work, you might quickly find yourself in severe financial difficulty. Income protection insurance can provide an income stream when you’re unable to work. 

The Australian Securities and Investments Commission advises that income protection insurance can cover for up to 70% of your gross wages,¹moneysmart.gov.au – Income protection insurance for a specified time period (for example, for two years or to age 65 dependent on the benefit period chosen). 

These payments replace your salary while you recover for the length of your benefit period, helping you to manage your daily living expenses such as education costs, mortgage payments, groceries, petrol, entertainment and health costs. 

If you’re considering income protection insurance, it’s also worth checking if any tax benefits apply to your premiums. 

Is income protection insurance tax deductible?

When it comes to income protection, whether or not you can claim it as a tax deduction depends on if it’s the premium or the benefit. Here’s how it works: 

• Premiums (what you pay): According to the ATO, you can claim the cost of premiums you pay for income protection insurance against the loss of your income.²Australian Taxation Office – Income protection insurance
• Benefits (what you receive): Any money received to cover your income under an income protection payout must be included as part of your taxable income. 

What tax deductions can you claim for income protection insurance?

As a general rule, you can claim your income protection insurance premiums as a tax deduction. The amount of tax deduction you can claim typically depends on: 

Your taxable income

Your taxable income determines which tax bracket you fall into. If you receive income protection benefits to cover your salary, you’ll need to declare it as part of your taxable income.

Your tax rate

Based on your income for the year, including any income protection benefits, you’ll be taxed at the appropriate marginal rate.

Your premium price

Your income protection premiums are usually tax deductible, so long as your policy covers income loss.

Based on these factors, it’s common for your tax deduction to vary based on your circumstances. That said, it could mean a significant reduction compared to the original premium you paid. 

What if your income protection insurance is bundled with other policies?

Your income protection insurance is the only element of the insurance premium that’s eligible for a tax deduction. So, if your insurance is bundled with several different insurance types, like life insurance or trauma insurance, you’ll only be able to claim a deduction for the portion of your policy that relates to income protection.  

For example, Samantha has a bundled insurance policy that she pays a premium of $250 for each month. This bundle includes $50 for total and permanent disability (TPD) cover and $200 for income protection. In this instance, only the $200 for income protection is tax-deductible because TPD premiums are not deductible. 

* This is an example only to illustrate the potential benefit of taking out income protection as part of an insurance bundle. It should not be relied upon as indicative of deductable premiums. 

Does income protection insurance include GST?

Income protection insurance is classified as a financial service, so income protection premiums don’t include GST.  

What should I consider when claiming income protection on tax?

When it comes to claiming income protection on tax, there are a few key considerations and common misconceptions to keep in mind: 

Claiming a policy that’s funded by your super

Income protection premiums paid through your superannuation are owned by the fund, so they claim the tax deduction themselves. Similarly, for self-managed super funds (SMSFs), income protection premiums are tax-deductible to the fund, not the individual.

Failing to keep records

The ATO requires you to maintain payment receipts and policy documents to support your claim. 

Thinking you’re exempt if you’re self-employed

Even people who own their own businesses have to declare income protection payouts, but they can typically claim premiums on their returns!

How do I qualify for an income protection tax deduction?

Generally, to receive a tax deduction for your income protection premiums you only need to be hold an income protection policy from an approved Australian insurance company.

Where can I find and compare income protection?

At iSelect, we’ve made it easy to compare income protection policies by partnering with the team at Lifebroker. Explore a variety of income protection policies from a range of leading insurers.