Income protection insurance is an important safety net when you are working and providing for your loved ones from your salary. In case you become temporarily disabled as a result of illness or injury, your income protection cover pays out a considerable percentage of your income. You can obtain your income protection insurance from a retail insurance provider or through superannuation. One of the considerations you will probably make when selecting the most appropriate way to obtain income protection cover is whether the premiums you pay for income protection insurance through super are tax deductible.
The tax deductibility of income insurance premiums can be complicated, but the main consideration would be whether a particular type of insurance product qualifies for deductibility. Generally, insurance premiums must be connected to the insured earning assessable income in order for a tax deduction to be applicable. This means that premiums for workers compensation insurance and income protection insurance are tax deductible. Income protection insurance is tax deductible whether taken out as a standalone policy or through superannuation.
It is worth noting that income protection insurance premiums are tax deductible as long as the benefit is meant to be paid in monthly installments to replace your regular income. However, since the Australian Taxation Office treats the benefit payments as income, this makes them taxable. If you combine your income protection with your death and disability insurance policy, only the portion of your premium that covers income protection is tax deductible. This means that in order to claim your tax deduction, you would have to determine the amount that would be deductible.
In certain cases, the premiums for income protection cover may not be tax deductible. For instance, if the benefit is paid as a lump sum, you would not enjoy tax deductibility. This is usually the case if your income protection cover is part of a death or disability insurance policy that pays out benefits as a lump sum. This is why it may be beneficial to hold this type of insurance separately from other policies. Alternatively, you could ensure that the amount of premium charged specifically for the income protection portion is clarified.
Generally, the amount of money you get to save through tax deductions in income protection insurance depends on the marginal tax rate you pay. However, insurance buyers should remember that contributions made to superannuation are capped, more information here. While there are tax deductions for income protection premiums inside and outside super, you would have a greater advantage if you paid for premiums outside super than if you exceeded the contribution amount provided in super for the same premium amount.
Before taking out income protection insurance through super tax deductible, it is important to be aware of all the consequences. For instance, you would not be eligible for benefits if you were receiving sick leave benefits. If you have a joint policy, you can ask your insurer for further information concerning the tax deductible portion of your premium payments. You should also speak to your financial planner before taking out your policy so you can fully assess your insurance needs and options.