As you put together your tax return for this year, you may wonder if you can claim any payments made for your life insurance policy as a deduction.
This depends on the type of insurance you hold and where you hold it. For more information on the different types of life insurance, please see our previous article.
If you have an income protection policy which is held outside super, any premiums paid during the financial year are usually tax deductible. This is because the cost of your cover is directly related to your employment income.1
Insurance which pays a lump sum to compensate you for physical injury or illness, like TPD or trauma cover, is not tax deductible.
If you have a bundled policy, only the portion of your premium payments which relate to your income protection cover will be deductible.1
So for example, if you pay $200 a month in premiums, $150 of which is for income protection, you will only be able to claim $150 a month in your tax return.
The amount of your deduction will depend on your premium costs, income and marginal tax rate. Your insurer will usually send you a statement summarising your income protection payments for the year, that you or your accountant can then use when preparing your tax return.
If you have an income protection policy held inside super, you are usually not able to claim your premiums as a deduction, as the refund is owed to the super fund and not you personally.
If you’ve received payments during the financial year as part of an income protection claim, this also needs to go in your tax return.2 Since insurers usually do not deduct tax from payments made to the owner of an income protection policy2, the ATO will most likely treat this as taxable income.
And if you’ve received a lump sum payment as part of an insurance benefit, this will need to be declared too.