Income protection insurance provides crucial cover to employed and self-employed Australians. It can replace up to 70% of lost income due to severe injury or illness. However, taxes on income protection impact your policy benefits and payments of premiums.
In this article, we will guide you on what you need to know about income protection and tax so you can make smarter financial decisions – whether as an individual or an employer.
Key Takeaways
- You can claim tax deductions for premium payments paid on individual policies (outside of super).
- Benefits from Income Protection must be declared as taxable income in your tax return.
- Employers can also claim tax deductions on the premiums they pay for group income protection policies.
- Income Protection policies within superannuation or salary sacrifice arrangements are not allowed to claim tax deductions.
Is Income Protection Tax-Deductible
Tax implications of income protection insurance depend on several factors. Below is a quick guide to help you understand.
Tax on Income Protection premiums
- If held individually – The premiums you paid for an income protection policy are generally tax-deductible, although the entire premium may not be deductible.
- If through superannuation fund – The premiums you paid for an income protection policy sourced through super will not allow you to claim for tax deductions.
Tax on Income Protection benefits
- When you receive payments from your income protection policy due to a claim, these payments are treated as taxable income – and must be declared in your income tax return.
If you need more information about income protection insurance and tax, you may visit the Australian Taxation Office (ATO) website.
Tax Benefits for Employees Buying Income Protection
One major advantage of securing income protection directly vs through superannuation funds is the tax. You can claim a tax deduction on the premiums you pay (generally at least a portion of it) for individually held income protection insurance.
By doing this, you reduce your taxable income and may yield a tax refund depending on your marginal tax rate.
Note: Not all of your premiums may be deductible. Speak with an advisor to understand what components of your coverage will be deductible to you.
Can Employers Claim Tax Deductions on Income Protection for Staff?
As an employer, there are also tax benefits when you offer group income protection to your employees. In Australia, the cost of providing group insurance to the employees is considered a business expense. Therefore, the business can claim the premium payments as tax-deductible expenses.
For most businesses, this strategy allows them to take care of their employees in a tax-efficient manner.
Group Insurance vs Individual Income Protection: What’s the Difference?
Group income protection insurance generally provides uniform income protection coverage to all the participating members of a certain group of individuals. While individual income protection insurance has a tailored income protection coverage—and is often flexible in terms. Below are the key features of the two.
Group Income Protection
- Generally has standard and uniform policy terms and coverage for all members
- Offered by employers, a superannuation fund, or an association
- Premiums are typically paid by the employer, trustee, or the association
- Benefits paid to the members are typically considered taxable income
- Policy coverage typically ceases once the member resigns or leaves the group
- The cost of premiums is typically lower due to bulk policies
Individual Income Protection
- Offers tailored policy terms and coverage
- Can be sourced directly from the insurance provider or insurance advisers
- Premiums are fully paid by the individual and are typically largely tax-deductible
- Benefit payments are considered taxable income
- Portable cover regardless of changes in employment
- The cost of premiums varies depending on the flexibilities and customisations
Note: Whether you are employed and have group coverage, you can generally still opt for additional coverage by getting individual income protection insurance.
When Income Protection Premiums Are Not Tax-Deductible
The following instances will typically prevent you from claiming a personal tax deduction:
- If the policy is held inside the superannuation fund
- If the premiums are paid on a salary sacrifice arrangement (i.e the deduction has already been claimed on your behalf)
- In a bundled policy, some of the portion of premiums paid for income protection is only tax-deductible
Tips for Maximising Your Tax Benefits
Consider these factors to maximise your tax deductions and benefits – and get more out of your policy.
- Make sure that you take out an income protection policy outside of your superannuation.
- If you have bundled policies, determine the portion of the premiums that goes to income protection.
- Understanding the impact of taxes on your income protection payouts, as they are considered assessable income by the ATO.
- Paying premiums annually allows you to claim a tax deduction for the full annual premiums.
- Seek expert financial help if you have a complicated tax situation.
Why Seek Advice Before You Claim for Tax Deductions
Getting your taxes right saves you from potential financial trouble and lets you maximise your policy benefits.
The rules for income protection insurance and tax are constantly changing and vary per individual and insurance policy structure. An expert insurance or tax adviser can help you navigate the complexities of taxes and keep you out of financial liabilities.
Get Help Finding the Right Cover with Curo
Temporarily losing an income can put someone in financial jeopardy. But with the right income protection insurance, you can focus on recovering from an accident or illness with financial peace of mind.
At Curo Financial Services, we will help you explore your policy options. We provide expert income protection insurance advice to individuals and businesses of all sizes. Our decades of experience working with hundreds of individuals and businesses have allowed us to get the best option for our clients.
If you are looking for individual or group coverage, contact us.
General Advice Disclaimer
General advice warning: The advice provided is general advice only and in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.
Factual Advice Disclaimer
The information I have provided you is purely factual in nature and does not take account your personal objectives, situation or needs. The information is objectively ascertainable and, therefore, does not constitute financial product advice. If you require financial product advice you should consult a properly licensed or authorised financial adviser.
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Last Updated on February 19, 2026 by Brent Satill
