Income protection insurance covers you for any loss of income through an illness or an accident. The insurance normally has a defined length of time for payment which typically can last from 2 years or until you’re 70. The duration of the payment is set at the commencement of the insurance policy and as a rule of thumb, the longer the payment period the greater the insurance will cost.
The other factor that affects the price is how soon you start getting your payment after your illness or accident. Most I have seen as an accountant start the payments after 4 weeks, once again the waiting time affects the cost of the insurance.
Why is the insurance tax deductible?
The insurance covers you for a replacement of your income, most income protection insurances companies will pay you a monthly amount that can be up to 75% of your income. The payments received from your insurance company will need to be included as part of your taxable income on your tax return that is lodged to the Australian Taxation Office.
As the insurance covers you for a taxable income then the cost of paying the premiums is a tax deduction. The yearly premiums can then be claimed on your yearly tax return. If you have a bundle of insurance paid at the same time, for example, a life insurance and income protection insurance, then only the income protection insurance premiums can be claimed. Most insurance companies supply a statement of premiums paid to the end of the financial year, make sure to include that information in your folder for taxation.
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