Is Income Protection Insurance Tax Deductible Inside and Outside of Super?

Income protection is tax deductible outside of super. Here's how it works.

Your income protection insurance premiums may be tax deductible if bought as standalone policy. The Australian Tax Office (ATO) states that any payment made for insurance that covers your regular income is regarded as tax deductible.

Premium/payout from policyOutside superInside super
Premiums you pay
  • Tax deductible
  • Not tax deductible
Payouts you receive 
  • Tax is payable
  • No tax payable

Enquire now for tax deductible income protection insurance

What if my income protection is through superannuation?

You are NOT able to claim deductions for any part of your premiums. Here's when premiums are not tax deductible:

  • Income protection insurance that has been taken out through your superannuation fund
  • Life, trauma or critical illness insurance

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Income Protection
Cover up to 85% of your income up to $10,000 per month if you can't work due to sickness or injury. Cover for over 1,000 jobs and full-time, part-time and self-employed.
  • Monthly benefit up to $10,000
  • Cover for applicants up to age 60
  • 30 day cooling-off period
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Income Protection
Income Protection
Receive up to 75% of your income each month to a maximum of $25,000 if you can't work due to serious illness or injury.
  • Monthly benefit up to $25,000
  • Available for applicants up to 59 years old
  • 21 day cooling off period
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How do I qualify for an income protection tax deduction?

The ATO allows you to claim a deduction for the costs of your premiums for income protection, if the policy is held outside of your super fund. Generally, you can only claim expenses as a tax deduction that are incurred in the generation of their assessable income and are not of a capital, private or domestic nature. Other insurances, ones that are designed to pay a benefit for physical injury, death, or accidents, are not generally tax deductible. These non-tax deductible policies generally include:

  • Life insurance
  • Trauma Insurance
  • TPD insurance.

What if I have a combined life and income protection policy?

If you combined your income protection with your Death and Disability insurance policy, you can claim a tax deduction for the portion of the premiums used to pay for income protection, as long as you can provide evidence. You can ask your insurance provider for further information on how much of your joint policy can be considered tax deductible.

Can I bring my premium payments forward to receive a deduction this financial year?

If you prepay your income protection before June 30, you can claim your tax deduction in the current financial year.

How does it work?

Brian is a 30-year-old actuary, earning $100,000 a year. He has in income protection policy that provides him with up to 75% of his monthly income should he be unable to work for an extended period of time. The premiums are $1,367 p.a. In order to claim the tax deduction in the current financial year (2014-15), he has opted to pay the premiums up front, prior to June 30. The example below highlights how the deduction affects his taxable income.

Less insurance deductionn/a-$1,367
Taxable income$100,000$98,633
Tax payable$26,944$26,413.87
Tax saving in 2015/2016*$530.13

*Including Medicare levy

When is income protection NOT tax deductible?

You can't claim a deduction for a premium or any part of a premium:

  • If the policy compensates you for incidents with a lump sum payment.
  • If the policy is provided through your super and the premiums are paid using your contributions.

For example, you can't claim a deduction for premiums paid for:

  • Life insurance
  • Trauma insurance
  • Critical illness insurance.

How much of a tax deduction can I claim on my income protection premiums?

The amount of money that you will receive back from your tax claim will depend on your marginal tax rate (the highest tax rate that you pay).

2015/2016 tax brackets

Taxable Income
Tax on This Income
0 - $18,200
$18,201 - $37,000
19c for every over $18,200
$37,001 - $80,000
$3,572 + 32.5c for every dollar over $37,000
$80,001 - $180,000
$17,547 + 37c for every dollar over $80,000
$180,001 and over
$54,547 plus 45c for every dollar over $180,000

Source: ATO, 2015

Breakdown of how your deduction is calculated

Case Study: Calculating Your Taxable Income for 2015/2016

Kylie is a Marketing Manager and earns $70,000 annually.

1) Calculation of Kylie's tax payable

Taxable income$70,000
Tax on income minimum$3,572
Addition for every dollar over $37,000$70,000 - $37,000 = $33,000
$33,000 x $0.325 = $10,725
$10,725 + $3,572  = $14,297
Plus medicare levy$70,000 / 100 = $700
$700 x 2 = $1400
$1400 + $14,297 = $15,697
Tax Payable for Kylie 2015/2016*$15,697

*Including Medicare levy

2) Calculation of Kylie's tax payable with income protection

Kylie has an income protection cover in place, payable at a cost of $900 per year. Income protection premiums are tax-deductible, so Kylie can claim the full amount of $900 to reduce her tax liability. As a result, her tax payable is calculated as the following:

Taxable income LESS insurance deduction$70,000 - $900
Tax on income minimum$3,572
Addition for every dollar over $37,000$69,100 - $37,000 = $32,100
$33,000 x $0.325 = $10,432.50
$10,725 + $3,572  = $14,004.50
Plus medicare levy$69,100 / 100 = $691
$691 x 2 = $1382
$1400 + $14,004.50 = $15,386.50
Tax Payable LESS insurance deduction for Kylie 2015/2016*$15,386.50 

*Including Medicare levy
As you can see from the tables above, Kylie can save up to $310.50 in her post-tax income after claiming her income protection premiums.

Please note that the calculations above only applies to Australian residents over the of 18.

How much can I save on my policy outside of super if I claim tax?

This will depend on your annual earnings and marginal tax rate. Consider the examples below for a policy that costs $800 p.a:

Policyholders Annual EarningsAnnual Premium to InsurerMarginal Tax RateTax RefundFinal Cost of Cover
Over $180,000$80045%$360$440
Between $80,000 and $180,000$80037%$296$504
Between $37,000 and $80,000$80030%$240$560

Income protection insurance tax deductible premium costs are unique to income protection insurance in Australia albeit only if the benefit payments are paid as a regular payment to replace lost income, although the benefits paid are treated as income and therefore taxable in the normal way. If the benefit is paid as a lump sum the premiums are no longer claimable as a tax deduction. This is a big help in managing the ongoing cost of the cover. Other life insurance policies have their own effects on taxation generally such as the following:

Term life insurance will pay out benefits to your beneficiaries should you die and to yourself if you're diagnosed with a terminal illness and only have 12 months to live. These benefit payments are generally tax-free. However this tax free status can be effected if the benefit is paid out through a superannuation fund, or if the benefit is paid to a person who in not considered to be financially dependent on you.

Other insurances such as total and permanent disability and trauma insurance are treated in a similar manner as term life insurance in that there is no taxation deduction allowed for any premium payments but the benefit payments are generally tax-free.

Read more on the tax treatment of other types of insurance

Common questions around income protection insurance and tax

Are income protection insurance premiums tax-deductible?YesProvided the benefit is paid in regular instalments replacing a regular income.
Are the benefits paid under an income protection policy taxable?YesThe benefit payments are treated as income by the Australian Taxation Office and are therefore taxable.
Do I pay GST on income protection premium costs?NoGST is only payable on fire and general type insurances, not life insurances.
DISCLAIMER: This article contains general advice and does not consider your own personal circumstances. It is not tax advice and the general nature of this material may not be applicable to you. You should obtain professional advice and verify our interpretation before relying on the information contained in our article.

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William Eve

Will is a personal finance writer for specialising in content on insurance. While he cannot give personal advice to clients, Will enjoys explaining the intricacies of different types of protective cover to help individuals and businesses find affordable cover that won't leave them underinsured.

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2 Responses to Is Income Protection Insurance Tax Deductible Inside and Outside of Super?

  1. Default Gravatar
    Peter | August 11, 2016

    I have a question on Tax Payable on Income Protection Payments.
    My wife was recently required to finish work due to serious illness and was paid a TPD payment, Lump Sum Superannuation and was also paid out in advance to 1/8/17 for an Income Protection Policy. She was initially paid Monthly by the Insurance Company (TAL) who then decided to Pay the Policy out. This total amount of Income Protection was included in my PAYG Summary for 2015/16 Financial year. Should this payment be included as assessable Income even though it relates to payment for a future date.



    • Staff
      Richard | August 11, 2016

      Hi Peter,

      Thanks for your question. is a comparison service and we are not permitted to provide our users with personalised financial advice. You may wish to contact the Insurance Law Service.

      All the best,

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