Income protection, Trauma, and TPD cover: Do all of these have a tax perk?

Different types of insurance like income protection, trauma, TPD, and others are available at your disposal, but do any of them have tax perks?

Let’s find out.

Income Protection insurance.

Income protection insurance is one of the most important policies you can acquire. It literally acts as a lifesaver, especially when an injury or illness keeps you from working.

Are your income protection premiums eligible for tax perks?

Australia’s financial services classification of income protection insurance exempts it from Goods and Services Tax (GST).

According to the Australian Taxation Office (ATO), only the premiums paid for income protection policies are tax deductible. However, it is worth noting the following two qualifications:

• You can’t claim tax deductions on income protection purchased through a superannuation fund.
• That the income protection insurance benefit payments (i.e. claim payments) need to be included as income and therefore are taxable.

Total & Permanent Disability Insurance.

If you sustain a permanent injury or illness and are unable to work, TPD insurance gives you a lump sum payment.

In most cases, you need to be off work six-twelve months to prove the permanent nature of your disablement.

You may be surprised to learn that premiums paid for TPD cover are not eligible for tax benefits, whether bought outside or inside a superannuation fund.

Are there any tax benefits for TPD cover contribution?

Yes, but only under certain scenarios. If your claim is successful, you’ll receive a lump sum, and most TPD benefits are not taxed. 

Your premiums are tax deductible in the event you follow more than 70% of Australians and hold your policy in a superannuation fund.

However, the tax perks depend on the cover you have selected. For example, you will be eligible for a 100% tax benefit on your premiums if you have ‘any occupation’ TPD cover.

By comparison, Own occupation TPD and Own occupation with death cover TPD give 67% and 80% tax deduction, respectively.

That apart, any benefit derived from TPD cover taken through the super fund is ineligible for a tax deduction.

Trauma insurance

Trauma insurance helps you manage your expenses and focus on your recovery.

Does Trauma cover contribution qualify for tax benefits?

• Notably, trauma insurance premiums are not tax-deductible.
• The Australian Taxation Office (ATO) advises that since a trauma insurance policy you pay does not replace the taxpayer’s earnings, the premiums are not tax-deductible.
• A trauma insurance policy pays money in the event the policyholder suffers from a severe medical condition. Earnings lost by the taxpayer are not replaced by the policy.
• Section 6-5 of the 1997 Income Tax Assessment Act (‘the 1997 Act’) exempts the benefits payable under these policies from being assessed under its income tax assessment provisions (formerly Section 25(1) of the 1936 Act).

There is no tax on the payout; you can use it in any manner that you prefer. You can use it to cover medical bills, hire a care assistant, or renovate your home. You could also use the money for debt repayment or the mortgage.

You cannot take trauma insurance through a superannuation fund after 2014. It is still possible that your superannuation fund might offer trauma insurance if you were in one before July 2014.

Comparing tax perks of Income Protection, Trauma, and TPD cover.

Here is a comprehensive comparison of tax perks between the following three insurance products.

Summing it up.

As we’ve seen, the various products all have their own taxation implications. Various tax perks. That said, the benefits that each policy provides you at a time of injury or illness far outweigh the tax position.