What you should know about income protection before EOFY 2019
You insure your car and home without question. Why not your income?
Income protection provides an ongoing payment that can supplement a large portion of lost income, should you become unable to work due to illness or injury. But unfortunately, income protection is often overlooked by Aussie households.
Ahead, we’ll take a look at the troubling under insurance gap in income protection insurance, along with the benefits of securing a policy before June 30.
Under insurance Gap in Income Protection
The under insurance gap is the difference between how much a financial loss will cost you and the amount you’re insured for.
You most likely protect your car and your home from the under insurance gap through car insurance and home and contents insurance.
Why, then, are so many Australians failing to protect the one area that dictates all of their expenses: their income.
In 2018, Rice Warner found that income protection insurance covers the smallest percentage of the working population among the different forms of life insurance. Only one-third of the Australian population purchased income protection insurance when they conducted their study.
Those who did purchase income protection insurance covered a “reasonable” 75% of their income, but the median amount of cover is only 36%.
According to Rice Warner, “The results of significant under insurance not only restrict the lifestyle the claimant and their dependants can enjoy after an unfortunate event, but it also incurs substantial cost to government mainly in the form of social security benefits.”
While the average policy of 75% of your income might seem like enough, it usually isn’t. According to another Rice Warner study of under insurance in Australia, parents with children should be insuring 85% of the family income.
The majority of Australian families don’t have income protection insurance, and those who do often don’t have enough.
Deducting Your Income Protection Premiums
Did you know income protection is 100% tax deductible? But there’s a catch.
You can only deduct your premiums if you pay for your income protection outside of super. And this only applies to premiums attributed to income benefits – not to capital benefits.
When the policy is inside your super, you won’t be able to claim your premiums as deductions on your taxes.
According to the Australian Taxation Office (ATO), you will not be able to claim a deduction on premiums for policies that compensate you for physical injury. This includes policies like life insurance and trauma insurance.
Although an injury or illness might force you out of work, the income protection policy doesn’t directly cover you for these ailments, meaning the premiums are tax deductible.
Combined policies are affected by this language, but only to a degree. You can still claim the portion of your premium that goes to income protection insurance.
If, for instance, your policy includes life cover, trauma insurance, and income protection insurance, you will only be able to claim the income protection part of your premiums.
Income Protection for Self-Employed Workers
The exception to this rule lies within self-employed workers. These workers can usually claim their income protection premiums as a deductible even when they have a policy inside their super fund.
Taxes on Income Protection Payouts
You will need to claim any income protection payouts you receive on your taxes – regardless of whether or not they were inside of your super fund.
If you receive a payout from outside of your super fund, you will pay taxes on it. Those who get their income protection insurance inside of their superannuation fund will almost always receive a Pay As You Go withholding tax on the benefit.
Purchasing Income Protection Insurance
Protecting your income with income protection insurance provides security and peace of mind. Losing a major source of household income can blindside a family who isn’t protected.
Get your income protection sorted today. It only takes a couple of minutes to get started.