Is income-protection insurance tax-deductible?

Working out the tax treatment on your income-protection premiums isn’t always simple. But here’s some points to help you work out what you can claim.

Why should I get income protection?

If you’re of working age you almost certainly have a range of outgoings – mortgage or rent payments, grocery and utility bills, school fees and/or car costs – that will continue even if your income ceases. Unless you’ve got sufficient savings to survive for months, or possibly years, without an income, it’s sensible to insure it, just as you would your house or car.

Is income-protection insurance tax-deductible?

Costs directly related to you being able to earn an income are allowable as a tax deduction. So this includes the premiums you pay for income-protection policies.

For example, someone earning $100,000 a year has a marginal tax rate of 39 per cent (including 2 per cent Medicare levy based on 2017-18 marginal tax rates). If they pay an income-protection premium of $2000, they may effectively get a tax benefit of 39 per cent of that amount (i.e. $780).

Example:

You earn $100,000
Your income-protection insurance premiums $2000
Your taxable income (leaving aside other deductions) $98,000
Potential tax benefit $780

While the premiums may be deductible, if you do make a claim under the policy, any money you receive from your insurer may be taxed the same way as if it was your salary, and should be included in your assessable income.

How many hours per week do I need to work to qualify for income-protection insurance?

Income-protection insurance is primarily designed for those with a quantifiable, regular income or who works at least 20 hours a week. Contractors and the self-employed are usually eligible, but special conditions may apply to them.

The following are not generally covered:

  • homemakers
  • unpaid carers
  • part-time employees working fewer than 20 hours a week
  • casual workers.

Also, check if your policy has any special requirements or conditions around paid or unpaid maternity leave as this may affect your eligibility for cover or the payments you may receive if you claim.

My income-protection policy is ‘bundled’ with my life, trauma or total and permanent disability insurance: can I deduct the whole premium?

A deduction may only be available for the portion that pays for income protection.

So, if you’re paying an annual premium of $4000, half of which is for income-protection insurance and half of which is for trauma insurance, you can only claim for half (i.e. $2000) of the premium.

What if I’ve got income-protection insurance through my super fund and have a separate income-protection policy from an insurer?

While you can’t directly claim a tax deduction for insurance bought through your super, there are favourable tax concessions available for personal contributions made to super.

But, when it comes to receiving the benefit, you can’t ‘double-dip’ and make an insurance claim through both funds. Typically, the most you can insure yourself for is 75 per cent to 85 per cent of your income.

It’s worth speaking to a financial adviser to see which strategy best suits your personal circumstances. Generally, income-protection policies taken out through super offer more restricted cover and because the cost of insurance premiums is deducted from your super balance, it could reduce the amount of money available for your retirement.

The information above is of a general nature only, and does not constitute tax advice or financial product advice. We recommend you seek tax advice specific to your personal circumstances from a tax adviser or registered tax agent. While ANZ has taken care to ensure that this information is from reliable sources, it cannot warrant its accuracy, completeness or suitability for your intended use. To the extent permitted by law, ANZ does not accept any responsibility or liability arising from your use of this information.

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