Life Insurances

GUIDE: Is Income Protection Insurance Tax Deductible?

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Can you claim a tax deduction for the annual premium cost of an income protection insurance policy?

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Is Income Protection Insurance Tax Deductible?

Income protection insurance is tax deductible in certain circumstances.

 

Annual Premiums are Deductible to Individuals

According to the ATO website, individuals can claim the costs of premiums paid for insurance that protects against the loss of their income (income protection insurance).

income-protection-ato-deduction

 

Example: The Value of a Tax Deduction

Remember if something is tax deductible this doesn’t mean the ATO will pay the full amount for you, rather you are entitled to claim part of the tax you have already paid back.

In other words the size of your tax deduction is determined in relation to the amount of tax you are meant to pay.

For example someone earning $90,000 per year will pay around 25.2% of their total income in tax.

Your Salary: $90,000

Tax Paid: $22,732

Tax Paid / Salary = 25.2%

Assuming you paid $1,000 in income protection premiums for the year (and had no other tax deductions to claim), your tax deduction would look like this:

$1,000 x 25.2% = $252.

So the after tax cost of the income protection insurance policy would be around $748.

Disclaimer: Please note that the information provided in the table above is general in nature only, and is based on current taxation laws which are liable to change. Prior to making decisions on life insurance and its taxation implications, you should consultant with your accountant/adviser and visit the website of the Australian Taxation Office (ATO) for more information.

The Catch

As you get a tax deduction for the insurance premiums, this means that any payout under the policy will be taxable just like your normal income.

income-protection-ato-deduction-payout-taxable

 

What if you hold your Insurance Policy in Super?

As outlined on the ATO’s website, you are not entitled to claim a personal tax deduction if you super fund holds the policy and pays the annual premiums.

insurance-premiums-paid-by-super

 

What About Other Life Insurance Policies?

According to the ATO website, you cannot claim a tax deduction for other life insurance policies such as life (death cover), trauma (critical illness) or TPD (total and permanent disability).

income-protection-ato-no-deduction

 

Some Interesting Income Protection Facts

Did you know:

car-insurance-and-income-insurance

Not Just for Old People

Here is the income protection claims TAL paid out in 2014 according to the age of the claimant:

tal-income-insurance-claims-by-age-2014

As you can see nearly one quarter of claims we made by people under the age of 35.

What Does Income Insurance Cover?

For an income protection policy to be triggered you must have suffered an illness or injury that renders you:

  • unable to perform all the important income producing duties of your primary occupation (the job you did before the injury event)
  • unable to work (whether remunerated or not); and
  • under the care, treatment and following the advice of a registered doctor.

So if you are capable of working part-time in your primary occupation or if you are working in any capacity, you would not be considered disabled.

CHART: Income Protection Claims by Type

tal-income-insurance-claims-by-type-2014

 * 2014 TAL claims statistics

FACT: Accident and Injury remains the highest source of income protection insurance claims

Income Protection Does Not Cover

It is worth noting that income protection does not cover you for:

  • losing your job (being fired, or made redundant); or
  • your business failing.

There are other insurance covers which you can get for such as redundancy cover and business expenses cover.

Summary

  • Income protection is tax deductible if you pay the premiums personally.
  • The size of the tax deduction is determined by the amount of tax you pay.
  • Income protection held in super is not tax deductible to you personally.
  • Other life insurance policies such as life, TPD and trauma are not considered tax deductible to you personally.

Not all insurance policies are the same. Make sure you read the documentation before you sign on the dotted line.

 The Wealth Guy Signature

 

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The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you with this.

 

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