Income protection insurance provides a regular income if you are unable to work due to illness or injury.

It provides vital peace of mind, and the premiums you pay may be tax deductible, which could deliver a nice saving at tax time. 

• However, only the premiums you pay are tax deductible. Any payouts you receive from your insurance company are probably not tax deductible.

• To claim income protection insurance as a tax deduction you must hold the policy outside of a superannuation fund.

• Claiming income protection insurance as a tax deduction will typically reduce your taxable income, and the amount of tax you pay. 

Income Protection & Tax

Understanding costs

There are a few important things to understand about claiming an income protection insurance tax deduction. 

For starters, we must distinguish between the premiums you pay for your income protection insurance, and any payouts you might receive from your income protection policy. 

• The premiums you pay for your income protection insurance are typically tax deductible.

• Any payouts you might receive from your income protection policy are generally not tax deductible. 

However, it gets a little more complicated than that. 

• For your income protection premiums to be tax deductible, you must hold an income protection insurance policy outside of your superannuation fund. If you hold income protection through your super fund, the premiums may not be tax deductible.

• Tax deductible income protection premiums must also directly replace your income. So if your income protection policy includes other benefits, that portion of the premium may not be deductible.

• For example, if trauma insurance is included as part of your income protection policy and covered under a single premium, you may be only able to claim the portion of that premium that relates to income protection.

Income protection and tax: Benefits

 If your income protection is tax deductible, then it can be listed on your tax return as a work-related deduction.

Tax deductions lower your taxable income, which could reduce the amount of income tax you pay. 

And if tax deductions lower your taxable income enough to put you into a lower tax bracket, you may pay a lower overall tax rate on your entire taxable income. 

Income protection and tax: Who is this for?

For your income protection policy to be tax deductible, you need to hold the policy outside of a super fund

Employees and self-employed people can make an  income protection tax deduction if eligible. However, for your income protection to be tax deductible with the ATO, it must be used as a replacement for your regular income.  Please note, we do not offer tax advice; for more details we recommend you consult a tax specialist.

Key terms

Tax deduction: An amount that can be subtracted from a taxpayer's gross income to reduce the amount of income that is subject to tax.

Premiums: Regular payments made to an insurance company to maintain coverage under an insurance policy. For income protection insurance, these premiums are typically tax deductible.

Taxable income: The total income subject to tax, including wages, salaries, and other income sources before any deductions are applied.

Non-deductible expenses: Expenses that cannot be subtracted from gross income to reduce taxable income. For income protection insurance, only the premiums related to income replacement are deductible, not those covering other benefits.

Policy benefits: The payments made to the policyholder by the insurance company when a claim is made. For income protection insurance, this usually refers to the monthly income payments provided during the period the person is unable to work due to disability or illness.

Tax return: The annual submission made by individuals or entities to the ATO, detailing income, deductions, and tax payable.

Income replacement: The core benefit provided by income protection insurance, which compensates for the loss of income due to inability to work.

Occupational duties: The specific tasks and responsibilities associated with a person’s job, which can affect the cost and conditions of income protection insurance policies.

Frequently Asked Questions

Is income protection tax deductible? The premiums you pay for income protection insurance are generally tax deductible if the policy replaces your income.

However, if the policy includes other benefits, such as a lump sum payment for a specific injury, that portion of the premium may not be deductible. 

Also, any benefits or payouts you receive from the policy are typically considered taxable income. That means they typically need to be included on your annual tax return and are subject to income tax. 

Can you claim income protection insurance on tax?

As above, income protection premiums you pay for insurance that replaces your income are typically tax deductible. 

But it’s important to note that if you hold income protection insurance through your superannuation fund, then premiums are generally not tax deductible.  

Where to claim income protection on your tax return?

If you are claiming a deduction for income protection insurance premiums, you should include it in your tax return as a work-related deduction. 

If you’re using the ATO’s myTax online portal, navigate to the ‘Deductions’ section from the main menu. Then go to the ‘Other work-related expenses’ sub-section, and enter the amount you’ve paid in eligible income protection insurance premiums.

How to claim income protection on tax return?

See above. 

Also keep in mind that while you typically are not required to submit proof of premium payments with your tax return, it’s a good idea to keep your income protection policy statements or payment receipts in case the ATO requests them. 

Do you pay tax on income protection payouts?

Yes. Any payouts you receive from an income protection policy that you hold outside of your superannuation fund are generally considered to be taxable income and must be declared in your tax return.

Additional resources

• Learn more about whether your income protection is tax deductible at the ATO.

• Find out about how much income protection insurance you can get through a super fund.

• Find a financial planner for expert advice on a range of issues. 

income protection insurance is just a quick click away.

Disclaimer

Compare Club compares selected products from a panel of trusted insurers. We do not compare all insurers or products in the market.

This information has been prepared by Compare Club Australia Pty Ltd, authorised representative of Alternative Media Pty Ltd, AFS Licence number 486326, www.compareclub.com.au. It is of a general nature only and does not take into account your individual needs, objectives or financial situation. Before making a decision about a life insurance product, you should consider the relevant PDS.

Sources

1. PAYG withholding tax on income protection payments, ATO

2. How can I get a tax deduction for my income protection?, eTax

3. Income protection insurance, ATO

Matthew Lang is the general manager of life insurance at Compare Club. Matthew leads a team of dedicated professionals who are passionate about helping individuals and families make informed decisions about their life insurance needs. Whether it's finding the right coverage for your specific circumstances, comparing policies, or optimizing your existing policy, Matthew and his team are here to provide expert guidance and support.

Meet our life insurance expert, Matthew Lang

Matthew's top life insurance tips

• 1

  Identify what you want out of life insurance before you buy. Knowing the purpose of your life cover will help you choose a policy that meets your needs.

• 2

  It's easy to assume that the sole purpose of life cover is to leave money behind for your family, but there's more to it than that.

• 3

  Life insurers like those on our panel pay an average of 97% of claims in full.

• 4

  There are different types of life insurance, including term life insurance, income protection, trauma cover and total and permanent disability cover.