Only the premiums you pay to protect your income (salary and wages) are deductible. This is known as income protection or continuing salary cover.
If you receive a payment to replace your salary and wages under an income protection policy, you must include it in your tax return. This is the case whether you receive a regular payment under the policy or a lump sum.
If you receive a payment for personal injury or total and permanent disability under the policy, the payment will be capital. In these circumstances, the payment might be assessable as a capital gain.
You can't claim a deduction if the policy:
- is through your superannuation fund and the premiums are deducted from your contributions
- pays you a capital sum to compensate you for injury.
For example, you can't claim a deduction for:
- life insurance premiums
- trauma insurance premiums
- critical care insurance premiums.
Example: policy premiums for income protection and injury
Deanne takes out an income protection and personal injury policy through her insurer.
She pays a total of $250 a month for the policy:
- $175 for income protection cover
- $75 for personal injury cover.
Deanne can claim $175 a month for the insurance policy. The remaining $75 is not deductible because it is capital in nature.End of example