Income protection insurance pays you an income if you are prevented from working as a result of illness or injury. The income payments you receive as benefits when you make a claim are usually 75 percent of your usual salary and are paid for the entire duration of your benefit period or until you go back to work. It is important to understand that income protection insurance is a deductable expense on your tax return but taxable when you make a claim.
Income protection payments taxable are at the insured’s normal marginal rate. This is based on the amount of income that you earn. The reason why income protection payments are taxable is because the Australian Taxation Office (ATO) considers it an income. As such, you are required to declare your insurance payments when filing your tax returns. Note that since premiums for this type of insurance are essentially money spent to help you earn an income, you are entitled to claim tax deductions for premium payments.
Agreed value vs. indemnity
The amount that you are eligible to receive as income protection benefits is dependent on the kind of policy you choose. When taking out your policy, you are required to choose between an agreed value insurance policy and an indemnity value policy. When you have an indemnity value insurance policy, the amount you receive in income protection benefits is dependent on your salary in the months preceding you leaving work. You will therefore need to present and submit your financial documents as proof of income when you are making a claim. The value of the claim could be up to 75 percent of your gross income.
An agreed value policy pays a benefit amount based on the salary you earn at the time you apply for the policy. This means you will not be asked to present your financial documents when filing your claim, but they will be required when taking out your policy. The main advantage of an agreed value policy is that you know what you will receive in benefits regardless of any possible changes in your income. However, the premiums for agreed value policies are usually 20 percent higher than those for indemnity contracts.
Choosing you policy
Generally, agreed value income insurance protection policies are appropriate for self-employed individuals. When you have this type of policy, the performance of your business or company will not affect the benefit amount. On the other hand, individuals earning a regular salary as employees could easily prove their income using their pay slip. Indemnity policies are therefore appropriate for employees since they are able to save on the premium payments.
Depending on your insurance policy, you will have to wait for a certain amount of time before your income benefits start coming in. Waiting periods typically range from 14 days to 2 years. Note that if you are receiving alternative income from other sources when you leave work due to illness or injury, your income protection insurance benefits may be reduced. Click here for more information. As such, it is important to discuss your insurance cover with your financial planner to ensure you do not have excess insurance.