Whether we have it or not, most of us know income protection is designed to replace most of a person’s income if they’re unable to work due to illness or injury. But many Australians want to know, is income protection insurance tax deductible?
Unlike other types of personal insurance, income protection premiums are tax-deductible, according to the Australian Taxation Office.
(The exception is income protection, or salary continuance, insurance provided through an industry or retail super fund, where the premiums are deducted from super contributions taxed at 15 per cent.)
The following table shows what you could potentially save on a premium of $1,000 a year by claiming it as a tax deduction:
* For illustrative purposes only.
† For 2017/18 financial year. Excludes the Medicare Levy and the effect of any Low Income Tax Offset.
‡ The deduction will depend on the taxpayer’s circumstances.
Someone earning an average income can get back roughly a third of the cost of their premium in tax. Those that are in the top income bracket can get back nearly half.
A good incentive – if you needed one in the first place – to protect one of your most valuable assets – your income.
In addition, you can pre-pay for up to 12 months’ of premiums (before June 30) in order to claim the tax deduction in the current financial year.
You should receive a statement in July or August showing what amount is tax deductible; if you don’t, contact your insurer to request it.
For combined policies that include other forms of cover as well as income protection, only the portion of the premium paid for the income protection component is tax deductible.
It should be noted that while the premiums are tax deductible, any benefit payments you receive are taxed as income.
For more information, speak to a registered tax agent or certified accountant.
Am I covered?
It’s possible you’ve got income protection insurance and don’t know it.
Not all super funds offer income protection insurance, but some provide you with a minimum level of protection by default.
If so, the fund will be deducting the premiums from your super account – unless you opt out.
Similarly, income protection insurance may be part of the salary package you receive from your employer.
If you’re unsure whether you’ve got cover, simply contact your super fund and employer to find out.
(You could save yourself a phone call by reading your last super statement; it should show if you’ve got cover in your super.)
You can now do a cost–benefit analysis of the different products available before deciding which is most suitable for you.
This post was brought to you by Budget Direct Life Insurance