Is income protection insurance tax deductible?

Income protection insurance is a type of insurance that could protect you financially if you’re unable to work due to sickness or injury. The added benefit is that according to the Australian Taxation Office (ATO), the premium paid toward income protection insurance is usually tax deductible. 

What is income protection insurance? 

Income protection insurance focuses on replacing a portion of lost income rather than covering medical expenses or property damage. Australian residents between a certain age, for example aged 18–60, who work a minimum number of hours per week (depending on the insurer) can apply. With income protection insurance, you can receive regular payments during periods when you are unable to work due to sickness or injury. These benefit amounts can then be used to meet essential living expenses like paying your mortgage or rent, taking care of electricity and gas bills and covering your weekly grocery shopping. It can give you peace of mind and financial protection to help you weather unexpected financial storms.      

How does income protection insurance work? 

So, how exactly does income protection insurance work? That depends on what type of policy you take out.

Direct policies 

Direct policies cover an individual, with income protection insurance purchased directly from providers like Guardian Insurance. As a policyholder, you pay premiums to the insurer in order to have a policy. In the event you get sick or injured and can no longer work, your insurer will pay a percentage of your pre-tax income, for a specified period – this is known as the benefit period. With Guardian Income Protection Insurance, you can cover up to 70% of your pre-tax income, up to $15,000 per month. You can also apply for a benefit period of 6 months, 1 year, 2 years, or 5 years and a waiting period of either 30 days or 90 days.

The benefit amount and waiting period (the time between becoming unable to work and receiving your benefits) are applied for at the time of your policy purchase. In many cases, you can customise the waiting period for your policy based on your individual needs and financial circumstances. With Guardian Income Protection Insurance, you can choose a waiting period of 30 or 90 days, whichever suits you.

Superannuation fund policies 

Alternatively, you might be able to get income protection insurance through your superannuation fund. Many super funds have income protection insurance as an optional feature, so you can buy cover using your super contributions. Premiums for these policies are often deducted directly from your super account balance.

While super fund income protection insurance is a convenient way to take out a policy it’s essential to carefully review the terms and conditions, as cover levels and benefits will vary between funds. Also be aware that premiums paid through super contributions are not tax-deductible.

Is income protection insurance tax deductible? 

It’s a common query for many Australians thinking about getting income protection insurance: are premiums tax deductible? The answer, as is often the case with tax matters, depends on several factors. According to the ATO: 

“Only the premiums you pay to protect your income (salary and wages) are deductible. If you receive a payment to replace your salary and wages under an income protection policy, you must include it in your tax return.”

Income protection insurance and tax    

While premiums paid for income protection insurance are generally tax-deductible, there are some exceptions. For example, premiums paid through superannuation funds are not tax-deductible if they are deducted from your contributions. It’s worth speaking to a professional tax agent to make sure you understand any and all tax implications specific to your situation.

Benefit payments 

When it comes to benefit payments received under your income protection insurance policy, the tax treatment depends on the nature of the payments. Regular benefit payments, for example, are generally considered taxable income and must be declared in your tax return. 

Should I speak to a financial advisor? 

It’s a good idea to speak to a tax professional or financial planner or advisor when you are thinking about either getting income protection insurance or trying to work out any tax deductions from your current policy. This is especially the case if you have questions about your eligibility, deductibility or any further tax implications.

You can also speak to a professional when you are reviewing a potential policy’s details or trying to figure out the most tax-efficient strategy for your financial situation.

Want to learn more about Guardian Income Protection Insurance and how it can give you peace of mind in case of an injury or illness? Request a quote online today.