Is Income Protection Tax Deductible?
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Is Income Protection Tax Deductible?

Toni Petto

Toni Petto

26/03/2021 • 8 minute read

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Income protection insurance can sometimes feel like a necessary but annoying bill. For many of us, it can be tricky to part ways with our cash for services we may never use. Especially when it’s expensive! Yet, what many people don’t know is that personal income protection insurance is actually tax-deductible. So, it might not be as expensive as it initially seems.

There are, of course, some limitations though. We’ve worked with Chartered Accountant and Registered Tax Agent, Brenda Morrice, from Yallaroy Business Solutions to put together this quick guide and give you the insights you need! Who said income protection had to make your taxes difficult?

What is income protection insurance?

First off, let’s take a look at what income protection insurance is and why it matters. Income protection is a type of insurance that covers a part of your income or salary if you are unable to work for an extended period of time. Usually, this will be due to illness, injury or total or partial disability. Basically, it’s designed to ensure you receive a weekly or monthly income if you are unable to work. This is super important as many of us don’t have a savings account large enough to support ourselves for a lengthy period of time if something were to happen.

Rents and mortgages are still due. You may need medical assistance which can be expensive. Daily expenses still happen, even if you’re out of the job for an undetermined period of time. So, income protection insurance can help stop you from falling into financial hardship while you’re recovering.

What information will I need to tell my insurer?

When you apply for income protection insurance your provider will require some information from you. In part, this is so that they can tailor your policy to your situation. This information will also affect what your premiums are, what type of policy they offer you, and what your benefit period might be. As a result, it’s important to give plenty of detail so that your policy is accurately tailored to you. This information can include:

  • Age
  • Income earnings (from salary, wage or commissions)
  • Lifestyle choices (i.e. if you’re a smoker, heavy drinker etc.)
  • Medical history (including any pre-existing conditions you might have)
  • High-risk activities that you might participate in (i.e. skydiving etc.)

Remember, you must answer all questions honestly. Providing false or misleading information could void your insurance policy when you need it most if your provider finds out. They could also deny any claim you make if they find that you have misled them. This could leave you unprotected in a time when you need it most.

Do I need income protection insurance?

Before you decide whether to purchase a policy, it’s important to determine whether income protection insurance is suitable for you. Income protection insurance effectively covers an agreed-upon portion of your income for a certain length of time if something happens to you and you are unable to work. If you’re not sure if you need it, ask yourself what you would do if you were unable to work. Many people who purchase income protection consider the following scenarios:

  • Do you have family or dependents that rely on the income you earn?
  • Are you self-employed and don’t have access to sickness or annual leave?
  • Do you have significant financial commitments you will need to keep repaying, even if you’re unable to work? I.e. home loans, credit cards, personal loans or car loans
  • Are there any family or friends who can help you out if you do lose your income?
  • Do you have access to any other way to pay for life’s expenses and support yourself if you temporarily or permanently lose your income and are unable to go back to work?
  • Would you have enough savings to cover the costs of any medical expenses you might incur from an injury or illness that stops you from working?

Consider these questions when deciding whether or not you need income protection insurance. They’re a great way to determine if you will need a helping hand if the worst were to happen. While it may seem like a burden now, your income protection insurance will be worth its weight in gold if you ever need to claim on it.

Is income protection insurance tax-deductible?

Many people who purchase this type of insurance don’t know that income protection is tax-deductible (and the only one, at that). So, when tax time rolls around you can actually claim your personal income protection premiums in your tax return. It’s important to note though, that you may not get a refund just because you claim the deduction.

According to Brenda, “There is no guarantee that you will actually get a tax refund just because you deducted the Income Protection Insurance. A tax refund is determined as the difference between the tax you paid during the year and the tax you needed to pay on your taxable income.”

What isn’t tax-deductible?

Some people rely on the income protection insurance that their superannuation policies offer. While this can be a good idea if you only need a basic level of cover or extra income protection payments won’t fit into your budget, it can mean that you lose out on a lot of benefits that paying for a personal income protection insurance policy might offer.

While it may feel like you are not actually paying premiums for your superannuation income protection policy, these premiums are in actual fact deducted directly from your super balance. One important benefit that you would lose out on if you opted for your superannuation’s income protection insurance policy is the benefit of being able to claim the premiums as a tax deduction. If your income protection policy is included in your superannuation, you cannot claim the premiums as a tax deduction.

Is a tax-deduction the only reason to opt for private vs superannuation cover?

Deciding whether to purchase private income protection instead of relying on your super provided insurance is an important decision. There are some important aspects to look at and whether or not your premiums are tax-deductible are just the beginning. Many people rely on the income protection insurance included in their superannuation policy as it seems cheaper and more convenient. However, this is not always the case. A policy through your superannuation is undoubtedly convenient, but it may not necessarily be the best choice for you. The difference in policies can be drastic:

  • Your premiums are tax-deductible if you opt for private income protection insurance. They are not if you choose to use the policy provided for you by your superannuation.
  • Income protection provided by your super tends to be fairly basic. It has a minimum level of coverage when compared to a policy that is tailored to your personal situation.
  • You are unable to choose the features that are most important to you when it comes to your income protection insurance policy. You may end up missing out on something that you would have opted for if you had had the choice.
  • Premiums for private income protection will be deducted from your income so it may seem more expensive initially. Remember, they’re tax-deductible come the end of the financial year.
  • Claiming on a policy provided through your superannuation company will be much harder to claim. This is because you can’t go directly to the insurance provider.

As you can see, tax-deductible premiums are just the beginning when it comes to private vs superannuation provided income protection policies. Take some time to figure out what works best for you and your budget before making your decision.

Brenda’s hot tip for income protection

Remember to review your policy annually, because during the year your income can change so you may need to increase the insurance cover. I have personally experienced the impact of not reviewing the amount of income that is covered and living on half our annual income. It was very tough as we had 2 very young children.

Another thing to be aware of is that all income protection policies come with a waiting period, which can be from 2 weeks to 3 months. This means that you will need to have some savings behind you to cover you until the payments kick in.

Quite often people will go for a longer waiting period because the insurance premium will be lower and this is fine so long as you have saved up 3 months worth of expenses. However, if you lack the discipline to save up 3 months worth of expenses, then you would be better off paying a higher premium and having a shorter waiting period.

So, should you get income protection for the tax benefit?

In this day and age, when nothing is certain, income protection insurance is a way of protecting yourself and your income. When you consider the fact that your premium payments are tax-deductible come tax-time, the cost of income protection insurance may not be that big of a deal.

While this isn’t the only reason that you should opt for private income protection insurance, it is certainly a great perk of having a personal policy separate from your super. At the end of the day though, we’re not financial advisors. So, you should ensure that you carefully research your options before committing to anything. In some cases, that may include seeking independent legal, financial, or taxation advice.

At Oiyo, we believe that knowledge is power. For other helpful information on income protection, make sure you check out our recent articles. We’ve covered everything from the 2020 APRA changes to options for self-employed individuals.

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Contributions from Brenda Morrice

This article features contributions from Brenda Morrice, Chartered Accountant and Registered Tax Agent from Yallaroy Business Solutions. Brenda holds a wealth of experience from her many years working as both a commercial accountant and in public practice accounting.


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Toni Petto

Written by Toni Petto

Toni Petto is a contributing Writer at Oiyo, specialising in finance, history and culture. She has a Bachelor of Arts in Anthropology and a Masters in Antiquities Trafficking and Art Crime Prevention from Glasgow University. She is currently a Freelance Writer and has previously worked within the finance sector.

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