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Deductibility of Premiums


Income protection insurance is one of the only types of insurance policies that is generally tax deductible, allowing you to potentially claim a sizeable deduction on your premiums.

When is a tax deduction granted?

The Australian Tax Office (ATO) will generally allow tax deductions for income protection premiums if the premiums can be directly linked to the protection in your ability to generate assessable income. 

When you can’t claim a tax deduction

The ATO will not allow a deduction on premiums paid toward an income protection policy that pays you a lump-sum benefit in the event you sustain a physical injury.

Therefore, if your income protection policy is combined with a death or disability policy that pays a lump-sum benefit, the proportion of your premium that goes toward this lump sum payment may not be eligible for a tax deduction.

If your income protection policy is combined with a death or disability policy, you must be able to determine which premiums go toward the death or disability part of your policy in order to claim your other premiums as tax deductible.

How much can you claim?

The amount of deduction that you can claim on your income protection policy depends on your marginal tax rate.

Example – Tax Deduction on Income Protection Premiums

Michael earns $90,000 per year and pays $1000 in income protection premiums annually.

As Michael earns between $80,001 and $180,000 p.a. his marginal tax rate for 2011-12 is 37%.

For this year, Michael will:

  • Pay his income protection company $1,000 in premiums, and

  • Be entitled to a tax refund of $370 from the ATO for his income protection premiums when he lodges his tax return.

Therefore the total cost of income protection for Michael will be $630, giving him a saving of 37%.

Varying deductions for different tax brackets

Continuing the above example, if Michael earned a salary that placed him in one of the following other tax brackets, and therefore paid a different marginal tax rate, the amount of deduction that he would receive on his $1000 in annual premiums would be:

  • If he earned annual income between $6,001 - $37,000 Michael would pay a marginal tax rate of 15%. Therefore he would receive a deduction of $150 on his annual premiums.

  • If he earned a annual income between between $37,001 - $80,000 Michael would pay a marginal tax rate of 30%. Therefore he would receive a deduction of $300 on his annual premiums.

  • If he earned a annual income over $180,000 Michael would pay a marginal tax rate of 45%. Therefore Michael would receive a deduction of $450 on his annual premiums.

How do I claim an income protection tax deduction?

You can claim a tax deduction on your income protection premiums when you complete your tax return. It is recommended that you speak with your tax agent or accountant who can advise you on what amount of your premiums is deductible.

Your income protection company will also generally send a premium statement to you in July of each year specifying the amount that is deductible. If you do not receive this statement it is advised that you get in contact with your life insurance company.

If you would like to find out more please call 1300 135 205 to speak with one of our friendly advisors.

Deductibility of Premiums