Here’s what you need to know about income protection
Income protection insurance purchased direct from an insurer is usually tax deductible, but how does it actually work? Unlike most insurance products, such as life, home and car insurance, income protection insurance can be tax deductible in certain situations. However, how it works can vary depending on a range of factors.
Before you try to claim income protection insurance premiums on your tax return, you should consider the following insights and speak to a professional to make sure you’re fully informed.
What is income protection insurance?
Income protection insurance is an excellent way of minimising risks associated with losing your income. This type of insurance pays you a percentage (usually up to 70%) of your pre- tax income for a specified period if you’re unable to work for a period of time due to sickness or injury. You can use this benefit to pay for anything you choose. Income protection insurance is designed to help you stay on track financially, especially with bills such as the mortgage or rent while you recover and can’t work.
Income protection insurance tax deduction
When considering income protection insurance, it’s good to know that it can be tax deductible for individuals in certain situations. Depending on your circumstances, you could claim the cost of your insurance premiums against the loss of your income, which means you could reduce your taxable income. Only the premiums you pay to protect your income (salary and wages) are deductible.
Income protection insurance through super
You may already have income protection insurance through your super. Some super funds automatically provide income protection insurance for a specified amount. You generally aren’t able to claim a tax deduction for income protection insurance premiums if the policy is taken out through your super, as the insurance premiums are usually deducted from your super contributions.
There are both pros and cons in general with holding insurance through a super account, such as; low premiums, however this may be due to limited cover; easy to pay tax effective premiums through your super account, however this can also reduce your super balance and savings at retirement; and fewer health checks as default cover is provided, however cover may also cease if you change super providers or are no longer working.
Policies outside of super usually allow a higher amount of cover and have more features and benefits available, so it may be worth considering the cover available under both types of policies and which one fits your needs.
What if I have other benefits included in my cover?
Income protection insurance can come with additional benefits. This means you could have a single policy that may also include a rehabilitation benefit or even a final expenses benefit, together with income protection. You cannot claim a deduction for a premium or any part of a premium which you paid under a policy to compensate you for such things as physical injury. Life insurance, trauma insurance and critical care insurance are some types of policies for which premiums are not deductible.
Are income protection insurance benefits assessable as income?
According to the ATO, you can claim the cost of any premiums you paid for income protection insurance against the loss of your income. You must also include any payment you received under the policy for loss of your income on your tax return.
This means, while your income protection premiums are typically tax deductible, your benefits paid out need to be included as part of your assessable income.
Benefits of income protection insurance
Keep in mind that tax deductibility isn’t the main reason to have income protection insurance. Other benefits include having peace of mind that you have a safety net if you get sick or injured and can’t earn an income, so you can focus on your recovery without worrying about your family experiencing financial stress.
Workers’ compensation covers you for work-related injuries or illness situations. If you become sick or injured outside of work, income protection insurance lets you receive up to 70% of your monthly pre-tax income up to a capped amount per month and for a period of time, depending on the provider. With the monthly payments, you could manage to meet your mortgage repayments, bills, and everyday expenses while receiving medical help to get better.
Avoid financial stress
If you can’t work due to an injury or sickness, and your regular income is affected, income protection insurance can help you continue to provide financially for you or your family.
With Real Income Protection Insurance, you can apply for an amount between $1,000 up to $15,000 per month (depending on your income) with a benefit period of either six months, one year, two years or five years. The income benefit will be paid for any approved disabling sickness or injury claim you make under the policy for a maximum period of time, called the benefit period. You can also choose a waiting period of either 30 or 90 days.
Income protection insurance could offer numerous benefits and, can help minimise the risk to your ability to financially support yourself and your family.
11 Jan 2024