Is Personal Accident Insurance Tax-Deductible?

Personal accident is tax-deductible but make sure you understand the conditions.

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Personal accident insurance provides weekly benefits if you are temporarily disabled and unable to work. If you take out this cover, it's a wise financial move to also consider it's tax implications.

Personal accident insurance is tax-deductible if:

  • Cover is in the form of income protection. The cost of premiums can be claimed as a tax deduction if accident cover is in the form of income protection.

It is not tax deductible if:

  • The policy is through superannuation. If the policy is taken out through your superannuation fund you cannot claim your premium payments as a tax deduction.
  • The policy benefit is paid as a lump sum. Premium payments made to provide cover for physical injuries under a life insurance, trauma insurance or critical care insurance policy are also not tax deductible.

Note: Remember to include any benefit payments you receive under your policy as income when you fill out your tax return.

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What are the general rules for claiming a deduction?

The rules for claiming insurance premiums as a tax deduction can be quite complex. Generally, you can claim insurance premiums as a deduction if you can demonstrate that the insurance is paid to protect your tax-assessable income. For small business owners, sole traders and anyone else for whom premiums are paid in order to protect their earning capacity, personal accident insurance is tax deductible.

According to the ATO: “you can claim the cost of any premiums you pay for insurance against the loss of your income”.

Insurance types that have claimable premiums

According to the ATO: 'you can claim the cost of any premiums you pay for insurance against the loss of your income'. Tax deductible premiums are available on these insurance types:

Are combined insurance covers tax-deductible?

Some companies offer combined insurance policies e.g. life insurance with personal accident cover. This can make things even more confusing come tax time. If you have one of these types of policies, you’ll need to work out to what portion of your premiums will be tax deductible.

If your personal accident cover is combined with a life insurance policy, only the personal accident cover component of your premiums is tax deductible. In cases where the premiums cannot be accurately apportioned, the ATO may treat the entire premium amount as non-deductible.

What about insurance cover taken out by business?

You can get tax deductions for premium on the following types of cover:

  • Workers’ compensation
  • Insurance to designed to cover foreign exchange losses
  • Key person insurance*

*Key person insurance is another common form of cover taken out by many businesses and is designed to cover the financial impact when a business loses a key employee. However, whether or not key person insurance premiums are tax deductible is conditional.

  • If the policy is taken out for revenue purposes to cover the loss of profit or revenue caused by the loss of a key person: the premiums will be tax deductible.
  • If the policy is taken out to protect against capital losses, the ATO may not allow you to claim the premiums as deductions.

Are benefit payments taxed?

The tax treatment of insurance benefits can also be a complicated and confusing topic. The following policies each attract their own individual circumstances and tax issues when you receive a benefit payment.

  • TPD (Total and Permanent Disability) Insurance. When held outside super, any benefits you receive are tax-free. However, the tax treatment varies if you hold a policy through your superannuation fund (see below).
  • Income Protection Insurance. Income protection cover offers monthly benefits which are usually taxed at your PAYG income tax rate.
  • Term life Insurance. Term life insurance typically offers a lump sum payment to your beneficiaries when you die or are diagnosed with a terminal illness. Such payments are usually tax-free, though this changes if your policy is held through your super fund.
  • Trauma Insurance. Benefit payments under a trauma insurance policy are generally tax-free.

How is cover taxed if funded inside or outside of superannuation?

Whether you hold an insurance policy inside or outside your superannuation fund can have significant implications in terms of how your premium payments and benefits are treated by the ATO.

For example, while TPD Insurance premiums for policies outside super are not tax-deductible, premiums paid on policies held inside super are tax-deductible if it satisfies the conditions of a “disability super benefit”. But when it comes to benefit payments, TPD benefits paid outside super are tax-free, while a portion of those benefits paid through a super fund may be subject to tax.

It’s similarly confusing when it comes to income protection cover. Premiums for a policy held outside super are tax-deductible; they’re also tax deductible inside super, but the deduction will typically be claimed by your super fund on your behalf. This means that any tax benefit will make its way into your super balance, not into your tax return.

When you consider just how confusing the tax treatment of insurance premiums and benefit payments can be when it comes to superannuation, it makes sense to seek expert advice from your accountant or financial adviser.

DISCLAIMER: Many of the comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to verify their interpretation and the information applicability to their own particular circumstances.

How exactly does personal accident insurance cover me?

Personal accident acts as replacement income to help:

  • Your family cope with ongoing bills and the cost of living, leaving you free to concentrate on your recovery.
  • With the cost of rehabilitation, undertaking home modifications and even vocational retraining.
  • If an injury leads to permanent disability or death, a lump sum benefit will be provided.
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