The new financial year is a natural checkpoint. You’re likely doing your tax return, or about to, which means income protection insurance deductions are front of mind in a way they aren’t for the rest of the year. It’s also a sensible moment to ask a second, more useful question: not just what you could claim, but whether your cover still fits your life.
Here’s what’s worth knowing.
Is income protection insurance tax deductible?
Generally, yes, with one important condition. The Australian Taxation Office allows a deduction for the premiums you pay to protect your income, provided you hold the policy outside superannuation and pay for it personally rather than through your super fund.
A few things affect how much you can actually claim:
- Only the income replacement portion is deductible. If your policy is bundled with trauma or total and permanent disability (TPD) cover, those components aren’t deductible because they pay a lump sum rather than replacing lost salary or wages. Your insurer’s annual statement should break this down for you.
- Held inside super, the rules change. If your premiums are paid from your super balance rather than your own pocket, you generally can’t claim a personal deduction for them.
- Any benefit you receive is taxable. If you ever need to claim and receive payments under the policy, those payments need to be declared as income, since they’re replacing the salary or wages you would otherwise have earned.
The deductibility question is useful to know, but it shouldn’t be the main reason you take out cover, or the main reason you review it. It’s a bonus, not the point.
How much income protection do I actually need?
This is the question that matters more, and it’s one a lot of people haven’t properly worked through.
Most policies cover up to a percentage of your pre-tax income, often somewhere in the 70 to 85 percent range depending on the insurer and structure. The right amount for you depends on your fixed costs, such as your mortgage or rent, your family’s day-to-day needs, and whether you have other income coming in if you were unable to work, such as a partner’s salary or savings you could draw on temporarily.
A common mistake is assuming the default cover bundled inside your super fund is enough. Sometimes it genuinely is. Often it isn’t, particularly once you have a mortgage, dependants, or a level of income that’s grown well past what a generic default benefit was calculated for. Default cover is built for an average member, not for your specific situation.
The honest way to answer “how much do I need” is to look at what you’d actually need to keep your life running if your income stopped tomorrow for an extended period, and then check that against what your current policy would pay.
What’s the difference between income protection and TPD?
These two often get bundled together, and people sometimes assume they’re the same thing. They’re not, and the distinction matters.
Income protection replaces a portion of your income while you’re unable to work due to illness or injury, paid as a regular ongoing amount, similar to a salary, until you recover or return to work.
Total and Permanent Disability (TPD) cover pays a lump sum if you become permanently unable to work, or unable to work in your own occupation or any occupation, depending on how the policy is defined. It’s designed for a different kind of event: not a temporary interruption to your income, but a permanent change to your ability to earn at all.
Most people benefit from having both, structured properly, rather than treating one as a substitute for the other. Income protection covers the gap while you’re recovering. TPD covers the scenario where there’s no returning to work as it was.
What does income protection actually cover?
Cover generally responds when you’re unable to work due to illness or injury, subject to the policy’s definitions, waiting period, and benefit period. A few things are worth understanding before you assume you’re covered for something:
- Waiting periods determine how long you need to be unable to work before payments start, commonly 30, 60, or 90 days. A longer waiting period typically means a lower premium, but it also means a longer stretch with no income before benefits kick in.
- Benefit periods determine how long payments continue, ranging from a couple of years to age 65 or 67 depending on the policy. This is one of the areas where default super cover is often quite limited compared to a tailored policy.
- Occupation definitions matter more than people expect. Some policies pay out only if you can’t work in your own specific occupation; others require that you can’t work in any occupation at all. The difference can be significant depending on your line of work.
This is exactly the kind of detail that’s easy to get wrong without a proper read of the policy document, and exactly the kind of thing worth checking rather than assuming.
Where this fits in your broader plan
Income protection rarely sits in isolation. It connects directly to your mortgage, your super, your family’s financial security, and decisions you’ve made or are about to make about debt and savings. If your income changes, your kids start school, you take on a bigger mortgage, or your business grows, the amount and structure of cover that made sense a few years ago may no longer fit.
This is part of what we mean when we talk about the Growth and Discovery stage of the financial journey: a period where responsibilities are growing, debt is often substantial, and the strategies that protect your income need to keep pace with everything else that’s changing. It’s also relevant earlier, in the Starting Out stage, where putting cover in place while you’re young and healthy is one of the more valuable financial decisions available, simply because premiums and underwriting are usually more favourable before health issues arise.
What should you do now the new financial year has started?
A few practical steps worth taking while this is front of mind:
- If you’re completing your tax return now, check whether you actually claimed the deduction correctly last year, and whether your policy is held inside or outside super.
- Ask your insurer for a breakdown of your premium if your policy is bundled, so you know exactly what portion relates to income protection, ready for next year’s return.
- Look at your benefit amount against your actual fixed costs and income, not the number that was set when the policy was first taken out.
- Use the start of the financial year as your prompt to properly review cover, rather than waiting until it crosses your mind again.
If you’re not sure where your current cover stands, or whether it still matches your circumstances, that’s exactly the kind of thing worth bringing to your next Annual Forward Planning Session.
Let’s make a time to talk it through.
Call us on (02) 8268 2900 or email info@insuranceadvisoryservice.com.au.
Disclaimer: This blog is general information only. This article does not take your personal circumstances into account. Please speak with us before making decisions based on it.
