24 September 2025 | See disclaimer
Specific policy terms: The exact tax treatment can depend on the specific wording of your income protection insurance policy. Always refer to your Product Disclosure Statement - and always seek advice from a tax professional.
Income protection can be an important form of insurance to have. This is because it can potentially cover part of your lost income if you are unable to work due to injury, illness, or disability.
But you may be wondering, are there any deductions around income protection when it comes to filing your tax return? The short answer is probably yes. However, there are some details you’ll need to pay attention to, which we’ll look at here.
This information is general in nature only and does not constitute financial advice. And, as always, it’s advisable to seek advice from a qualified tax professional who can help you understand the tax implications of your income protection insurance.
Income Protection Insurance Tax Deductions
Income protection insurance pays a monthly benefit of up to 70% of your regular income (before tax) due to sickness or injury, but the key to what is and is not tax deductible is very much tied to your policy. That means, the policy must be designed to replace income that you would otherwise earn and pay tax on.
For example, policies that provide a benefit or lump sum payment - such as to cover trauma, critical illness, or life insurance - are not tax deductible. If your policy is bundled with other covers, only the portion of the premium tied to the income protection component can be claimed.[1]
To better help you understand, let’s take a look at a potential real-life scenario: John, an electrician, purchases a Life Cover policy with Trauma Cover as an optional extra to help safeguard his family. His annual premium is inclusive of the income protection portion to replace his salary if he can’t work due to illness or injury.
Trauma cover and life insurance are not tax deductible in this situation. This means that when John lodges his tax return, he cannot claim the full premium - he can only claim a tax deduction for the premium related to the income protection component. [1]
In short, only the premiums you pay to protect your income (salary and wages) are deductible.[1]
Policies Held Directly
Things can change if you hold a direct income protection policy (that is, a policy that you purchased directly from an insurance provider, not a superannuation fund). In this case, if you pay premiums directly to an insurer for a policy held in your own name, you can generally claim a tax deduction for the full premium amount.
Are the Benefits from Income Protection Taxable?
There are some exceptions to the taxability of income protection benefits. These include:
- Pre-tax contributions. If you paid premiums for your income protection insurance using pre-tax income (such as salary sacrifice), the benefits received are generally taxed only on the amount that exceeds your premiums.
- Post-tax contributions. For premiums paid with after-tax income, the entire benefit received is generally considered taxable income.
- Lump sum payments. Lump sum payments from income protection insurance are generally taxed differently.
- Specific policy terms. The exact tax treatment can depend on the specific wording of your income protection insurance policy. Always refer to your Product Disclosure Statement - and always seek advice from a tax professional.
In addition to this, benefits received from an income protection policy are considered assessable income[1]. This means you need to declare the payments on your tax return and pay tax on them - just like you would do for regular income from your job.
What About Life Cover Policies?
There is a difference between life insurance and income protection. The biggest note to take away is that life insurance pays a lump sum if you pass away. On the other hand, income protection will give you ongoing payments.
Keep in mind, there are policies that combine income protection with other cover, including Life Insurance, Total and Permanent Disability (TPD), and Trauma Insurance. But, in general, only the portion of the premium that relates specifically to the income protection cover is tax deductible.
Award Winning Life Insurance with Budget Direct
Awarded Money magazine’s Best Value Direct Life & TPD Insurance award in 2024 and 2025, Budget Direct offers cover for Total and Permanent Disability (TPD), Trauma Insurance and Income Protection Cover.
When you have a policy that puts together income protection with other inclusions such as life insurance, your insurer should provide a premium summary of your cover that tells you how much of your total premium relates to the income protection part and how much relates to the other covers.
How to Claim Deductions on Your Tax Return
One of the best first steps you can take when it comes to claiming deductions is to consult with a tax professional. They are best qualified in the ins and outs of tax, and can help you settle a better tax return.
Aside from this, keep a paper trail of everything. Accurate record-keeping is important to the ATO, and failure to do so could lead to an audit. When it comes to lodging your tax return, you can do so via the ATO’s online services - however, their pre-fill service may already have some information, but always double-check it against your own records to avoid issues in the future.
Tax time can be complex, especially when you have additional insurance policies in play. You may consider working with a tax professional to ensure a positive outcome. You should also look at your personal financial situation, needs and expectations, and read the relevant Product Disclosure Statement (PDS) before you purchase any life insurance policy.
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