Is income protection Insurance tax deductible?
12 May 2023
An introduction to income protection insurance
You have always worked to support yourself and your family, and you may well have people relying on your income to go about their normal lives. It’s hard to picture not being able to work, but what would you do if you were forced to take time off because you were injured or unwell? Would you have sufficient savings to cover your expenses for months or even years? Income protection insurance is one way of helping to ensure financial security in case injury or illness prevent you from working. It can offer you and your loved ones peace of mind, and can be valuable for sole traders or self-employed people who aren’t covered by workers compensation.
If you are injured or ill and unable to work, Suncorp income protection insurance provides you with monthly benefits of around 75% of your income, typically capped at $10,000/month. The benefits become available after a waiting period, pre-agreed upon the purchase of your policy, and will typically last up to two years or until you are 65. By taking away the stress and concern associated with a potentially significant loss of income, you will be free to recover, rehabilitate and get ready to return to work once you are able to.
Who can claim income protection insurance?
Income protection insurance is generally available to Australian citizens or permanent residents who work more than 20 hours per week. Each insurance provider will have their own questions about your life and work, often including minimum work requirements, that will help them to put together a level of cover and premium structure that suits you.
What tax deductions can you claim for income protection insurance?
To answer this question it’s best to look at income protection cover from two perspectives - the premiums (what you pay) and the benefits (what you receive). If you receive benefits from income protection insurance, generally these should be reported like your usual earnings at the end of the financial year. They do form part of your taxable income, which means they will be taxed at the appropriate marginal rate - like your normal salary. You should bear the total benefits and tax implications in mind when creating a sensible budget for your period out of work.
On the other hand, the premiums that you pay to be covered by an income protection policy are generally deductible in your tax return where the benefits paid replace lost income. The Australian Tax Office calls this income protection of existing salary cover. This advice is general, so you should work with your tax adviser or accountant to establish what level of deduction you are able to make based on your individual policy, and to include this in your annual tax return.
What if my income protection insurance is part of a life insurance policy bundle?
Some people will structure their insurance via a ‘bundle’ - this means purchasing multiple cover types at the same time. This is also true with life insurance, as people may opt for a range of policies to ensure they are sufficiently covered for a number of different circumstances. Other life insurance types that are frequently bundled with Income Protection include Total Permanent Disability, Life Insurance or Critical Illness cover. However, Income Protection insurance is the only insurance type that is eligible for tax deductions on premiums - you can’t claim a deduction on premiums paid in a lump sum. Your adviser or accountant will be able to help with how the reporting happens in practice. But put simply, if your premiums are $1,000 and only $250 of this relates to Income Protection insurance, only this part of the premium can be tax deductible.
Claiming income protection tax deductions through superannuation premiums
Quite often, you can obtain life insurance through your superannuation, and this is also true of income protection cover. Check what you are eligible for under your current superannuation set up. If your income protection premiums are arranged through your superannuation you cannot claim these as tax deductions. In this case, it’s best to work with your adviser and the Australian Tax Office guidelines to ensure you’re making the most of any possible deductions.
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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 12 MAY 2023 BUT MAY BE SUBJECT TO CHANGE. TAL IS NOT LIABLE FOR ANY LOSSES THAT MAY ARISE FROM RELIANCE ON THIS INFORMATION. TAL 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.
Suncorp Life Insurance products, other than in some circumstances the Redundancy Benefit, are provided by TAL Life Limited ABN 70 050 109 450 AFSL 237848 (TAL Life) which is part of the TAL Dai-ichi Life Australia Pty Limited ABN 97 150 070 483 group of companies (TAL). TAL companies are not part of the Suncorp Group. TAL companies use the Suncorp brand under licence from the Suncorp Group.
Redundancy Benefit issued on or before 31st March 2020 was offered by AAI Limited ABN 48 005 297 807 AFSL 230859 (AAI) which is part of the Suncorp Group. New Redundancy Benefit policies and renewals offered from 1st April 2020 are issued by TAL Life. The different entities of TAL and the Suncorp Group of companies are not responsible for, or liable in respect of, products and services provided by the other.
Any advice on this page in connection with the Life products is general in nature and is provided by Platform Ventures Pty Ltd ABN 35 626 745 177 AFS Representative Number 001266101 (PV). PV is part of the Suncorp Group and an authorised representative of TAL Direct Pty Limited ABN 39 084 666 017 AFSL 243260 (TAL Direct). General advice does not take into account your individual needs, objectives or financial situation. Before you decide to buy or to continue to hold a Life Product you must read the relevant Product Disclosure Statement. The Target Market Determination (TMD) for the product is also available.