Can I claim deductions on my income protection insurance?

By AAMI 27 May 2021

Your ability to work is one of your greatest assets and usually vital to staying on top of your regular expenses as well as keeping your bigger picture life plans squarely on track. Given this reliance on your income it’s worth considering how you can protect it with income protection insurance.

Of course, the answer to ‘What is income protection insurance?’ can be found in its name: income protection insurance can help protect your income if you’re unable to work because of sickness or injury. Generally speaking, it pays up to 75% of your average income (less business expenses), up to $10,000 a month, if you’re unable to work for a set period of time. You can find out more about the specifics of AAMI Income Protection here.

As an added incentive, it may even be claimed as a tax deduction. AAMI Life takes you through what you need to know.

Do you own the policy?

If you own the policy, you may be able to claim income protection insurance as a tax deduction. As long as you’re an Australian resident, it shouldn’t be an issue since the premiums are paid for benefits designed to replace any lost income should you ever need it.

Is income protection part of your superannuation fund?

It’s a different story if your income protection insurance is held through your superannuation fund because you’re not the owner of the policy – your superannuation fund is. So, you make contributions to your fund, either through your employer or personal contributions, which the fund then uses to pay for the premiums.

Any personal contributions to your fund may be claimed as a tax deduction, but there are caps on the total amount of concessional contributions you can make each year - so please consider this otherwise you may have to pay extra tax.

Superannuation law can be complicated, so it’s recommended that you get professional advice before you do anything. Your fund may be able to claim a deduction for the premiums it pays for the insurance, which may be reflected in your superannuation statement. If you want to know more, you can seek advice from your superannuation fund.

Find out more about the difference between income protection through super and a standalone policy here.

Is income protection insurance expensive if I take out a policy directly through an insurer?

Income protection premiums will vary based on numerous factors, such as age, lifestyle, health and smoking status. It will also be impacted on the waiting period and benefit period that you choose. Generally speaking, the longer the waiting period and the shorter the benefit period, the lower your premium will be. When considering income protection insurance, it’s a good idea to do some research first to ensure you are choosing a policy that suits you and your loved ones needs.

Will I have to pay tax on any benefits received through income protection insurance?

If you need to make a claim on your income protection policy, the income replacement you receive will generally be assessable as income and liable for tax just like your regular income.

However, if you have other forms of insurance, such as life cover or Total and Permanent Disability (TPD) insurance, it should ordinarily be tax free.

If your superannuation fund holds a life insurance product for you, the tax you’ll need to pay on any insurance benefits that are paid out will depend on several things, such as the type of insurance claim and the age you are at the time of a claim for a TPD benefit.

Ask the experts

The information provided here is for general purposes only. Since Australian tax law can be complex, it’s important to get professional tax advice for your individual circumstances. A professional, such as a registered tax agent or registered tax adviser, can give information that is specific to your situation.

Forward planning and want to know more about the different ways you can help protect you and your family? Explore AAMI life products online, or call the AAMI Life team on 13 22 44.

INFORMATION PROVIDED IN RESPECT OF TAXATION LAW IS GIVEN IN GOOD FAITH AND FOR THE GENERAL INFORMATION PURPOSES OF AUSTRALIAN TAX RESIDENTS ONLY. IT IS BELIEVED TO BE ACCURATE AS AT 01 JULY 2020 BUT MAY BE SUBJECT TO CHANGE. TAL IS NOT LIABLE FOR ANY LOSSES THAT MAY ARISE FROM RELIANCE ON THIS INFORMATION. TAL DOES NOT GIVE, AND DOES NOT PURPORT TO GIVE, ANY TAX ADVICE. AS THE APPLICATION OF TAX LAW DEPENDS ON EACH PERSON’S INDIVIDUAL CIRCUMSTANCES, YOU SHOULD ALWAYS SEEK ADVICE FROM A QUALIFIED TAX PROFESSIONAL.