If you are employed and rely heavily on your income to pay your mortgage and other debts, then it is time for you to consider having income protection insurance. This type of policy will give you peace of mind knowing that you will still have an income in the event that you are unable to work due to an illness or injury. The benefit from income protection will enable you to not only service your loans, but also maintain your lifestyle until you are able to resume work.
It is important to understand the benefits you will get from income protection insurance and tax regulations affecting your policy. Income protection insurance is tax deductible because the benefit you get is regarded as a substitute to your regular income. In case you had taken out your income protection insurance as a combined policy with your death policy, you can still claim tax deduction.
You will need to show what part of the premium is used to pay for income protection, and you can then claim a tax deduction based on this amount. Your insurance provider will be able to advice you on how much of the premium is used to pay for income protection. If it is not possible to define what part of the premium specifically pays for income protection, then you will not be able to claim for tax deductibility.
Non Eligible Situations
There are instances when you will not be able to claim tax deductibility for your income protection insurance. If you have a policy that is meant to pay your benefit as a lump sum amount, you will not be able to claim tax deductibility. You will also not be able to claim for tax deductibility if you have taken out your income protection insurance through your superannuation fund.
Income Protection Through Employers
If your employer has taken out an income protection insurance policy on your behalf, then the company can apply for a tax deduction. However, when the benefit is paid out to you, it will be taxed since this benefit is treated as an income for you.
Once you make a claim for tax deduction, the amount you get will depend on your marginal tax rate, which is the highest tax rate that you are supposed to pay. If you successfully make a claim and are paid the benefits, then you should include this payment when making your tax returns.
When your income protection cover is within the super fund, you have to satisfy the insurance provider and the trustee of the fund on the legitimacy of your claim before any benefit can be paid out. If you are able to satisfy both parties that yours is a legitimate claim, the insurance provider will pay your benefits to the trustee, who will then pay you. This process sometimes ends up causing delays.
You can make savings on your income protection insurance, and tax reduction can also be achieved. All you need to do is pay your premiums yearly or every six months. This payment, however, has to be made before the 30th of June. This helps you push your tax deduction forward, so you will end up with less tax. Visit us for more information about income protection insurance.