Is Income Protection Insurance tax-deductible?

Income Protection Insurance pays a monthly benefit of up to 75% of your regular before-tax income if you can’t work due to a serious illness or injury.

While premiums for Income Protection Insurance are generally tax-deductible, you need to make sure you understand the tax implications of how you buy your cover.

When you can claim a tax deduction

According to the Australian Taxation Office (ATO), Income Protection Insurance premiums are generally tax-deductible.

However, you can’t claim a tax deduction for a premium or any part of a premium:

  • for a policy that compensates you for physical injury (e.g. Life Cover, TPD Insurance or Trauma Insurance). For example, if you have a combined Life and Income Protection Insurance policy, you are permitted to claim a tax deduction for the portion of premiums paid for the Income Protection Insurance only.
  • where the policy is taken out through your superannuation and insurance premiums are deducted from your super contributions. Read more about Superannuation and Life Insurance.

What about Self- Managed Superannuation Funds (SMSFs)?

According to Wealthsmart.com.au, Income Protection Insurance can be bought and managed through your SMSF. But unlike an industry or retail super fund, the premiums are tax-deductible. Premiums will also come out of the fund, meaning you don’t have to pay the cost directly from your own pocket.

In addition, it should be kept in mind that Income Protection Insurance contributions are included in your concessional (pre-tax)  contributions cap. As significant financial penalties exist for exceeding this cap, financial advice should be sought to ensure compliance is maintained.

What you need to declare

If you make a claim on Income Protection Insurance, the benefit payments you receive are generally paid tax-free from the insurer.

As these benefits replace regular income, the ATO also stipulates that any payments received under an Income Protection Insurance policy must be included on your tax return as part of your assessable income.

Please note that the information we provide is not advice but general information only.

 

Read more about Income Protection Insurance on the NobleOak website.