Tax Benefits of Income Protection Insurance in Australia
If you’ve ever wondered whether income protection insurance is worth it, here’s one reason it might be: it can help protect your income and reduce your tax bill.
For Australians looking to protect their earnings, income protection insurance provides monthly payments if you’re unable to work due to illness or injury. But what many don’t realise is that — unlike most personal insurances — it may also offer tax benefits when structured correctly.
Let’s unpack how this works and what to be aware of.
How Income Protection Insurance Works
Income protection insurance replaces up to 70% of your income if you can’t work because of an injury or illness.
It’s especially valuable for:
Self-employed workers without sick leave
Tradespeople and professionals in physical jobs
Families relying on one income
Mortgage holders who can’t afford to miss repayments
The payments you receive help you stay afloat while you recover — covering rent, groceries, bills, and other essentials.
When Income Protection Premiums Are Tax-Deductible
If your income protection policy is held outside of superannuation, the premiums you pay are generally tax-deductible under Australian tax law.
That’s because it’s considered a form of income replacement, rather than a capital benefit.
This means that at tax time, you may be able to claim the cost of your premiums as a deduction, potentially lowering your taxable income.
However, it’s important to note that this only applies to standalone income protection policies — not those bundled with life or TPD cover, or those held inside super.
What Happens if Your Policy Is Held Inside Super
If your income protection insurance is paid through your super fund, you won’t personally claim the deduction — your super fund may claim it instead.
While this setup can make premiums feel more affordable (since they’re paid from your super balance), there are trade-offs:
The cover might be more limited
Claim definitions may differ
Payouts could be slower or taxed differently
That’s why many Australians choose to hold retail income protection outside super for greater flexibility and clearer benefits.
Tax on Income Protection Payouts
There’s one important thing to understand — while premiums can often be tax-deductible, the payouts you receive are generally taxable as income.
That’s because the payments replace your salary or wages. However, because your income is lower while you’re off work, the tax you pay is often less than your usual rate.
The key takeaway: you can’t claim both tax-free benefits and tax-deductible premiums, but the structure still helps you maintain your financial stability and reduce the impact of lost income.
Other Things to Keep in Mind
Here are a few additional points to consider when thinking about tax and income protection in Australia:
You can only claim for policies that protect your personal income — not business expenses.
You can’t claim for premiums on combined “bundled” life or TPD policies.
Keep all premium statements and payment records for your tax return.
Speak to a registered tax agent for personal guidance.
Why Income Protection Still Matters Beyond Tax
While the tax benefit is attractive, the real value of income protection insurance lies in financial security.
It ensures that when you can’t work, you can still meet your financial commitments — and keep life moving forward.
It’s not just for high earners or business owners — it’s for anyone who relies on their income to maintain their lifestyle.
Why Australians Choose Covered Life
At Covered Life, we help you find income protection insurance that suits your job, budget, and personal circumstances — without unnecessary complexity.
Our team can help you:
Compare tax-effective policies across major Australian insurers
Understand how to structure your cover inside or outside super
Tailor benefit and waiting periods to your situation
Review your existing policies for value and relevance
We make it simple, transparent, and completely obligation-free.
General advice disclaimer: The information in this article is general in nature and doesn’t take into account your personal financial situation, needs, or objectives. Always seek advice from a licensed professional before making decisions about your insurance cover.
