Income protection payments are regular monthly benefit payments from your income protection insurance policy when you are unable to work due to illness or injury. These payments typically replace 70 to 85% of your pre-disability salary after a waiting period, which can range from 14 days to two years.
The payments are taxable as salary or wages with PAYG withheld by the insurer, whilst premiums paid outside of superannuation are generally tax deductible.
Income protection insurance provides benefit payments when you are unable to work due to illness or injury, replacing 70 to 85% of your pre-disability salary paid monthly by your insurer.
Your policy will include a waiting period, commonly 30 days though this can range from 14 days to two years, before payments begin. It will also include a benefit period which determines how long payments continue, either for a fixed term such as two years, or up to age 65 for longer term policies.
Your income protection benefit is calculated as the lowest of three figures:
In practice, this means your benefit is capped, and it is not always as straightforward as simply receiving a percentage of your last pay cheque. This is one of the areas where we find clients are most often caught off guard, particularly those who assumed their full salary would be covered.
Insurers assess your income based on the prior 12 months of earnings, typically excluding bonuses, commissions, and overtime unless your policy specifically includes them.
For example, a client earning $100,000 per year could expect to receive somewhere between $5,000 and $6,000 per month in benefit payments depending on their policy settings and insurer.
It is also important to understand how offsets work. If you are receiving payments from another source such as workers compensation, your income protection benefit will likely be reduced accordingly. Centrelink payments however are generally not offset against your income protection benefit.
To put this into context, consider Sarah, a nurse earning $100,000 per year. After injuring her back at work, Sarah is unable to return to her role for six months. Based on her policy settings, she receives 75% of her pre-disability salary, which works out to $6,250 per month before tax. However, because she is also receiving workers compensation payments during this period, her income protection benefit is offset accordingly, reducing her monthly payment from her insurer. Once her workers compensation ceases, her full income protection benefit resumes.
Income protection payments are treated as assessable income by the ATO, meaning they are taxable as salary or wages and must be declared on your tax return. Your insurer will report payments via a payment summary or income statement which you will need when lodging your return.
Many people are genuinely surprised at tax time when they realise their benefit payments are taxable, particularly if their insurer has not been withholding PAYG throughout the year. We make it a point to ensure every client understands this before their policy is even in place, so there are no unexpected bills arriving at an already difficult time.
If tax has been withheld by your insurer, declare your payments at the salary and wages label in myTax. If no tax has been withheld, declare them under allowances. Keeping records of all payment statements is essential.
| Aspect | Detail | Taxation Impact |
|---|---|---|
| Premiums held personally | Paid outside superannuation | Generally tax deductible |
| Premiums held in super fund | Paid via superannuation fund | Not personally deductible; fund may claim deduction |
| Benefit payments | Received from your policy | Taxable as salary or wages |
| PAYG withholding | Withheld by insurer | Declare at salary and wages in myTax |
| No PAYG withheld | Insurer did not withhold | Declare under allowances in myTax |
| Offsets | Workers comp or similar | Reduces benefit but each taxed separately |
To claim income protection benefits, speak to your insurer as soon as possible and submit medical evidence confirming you are unable to work.
Insurance claims can only be lodged once your waiting period has ended. The two most common reasons claims are delayed are incomplete medical evidence and missing financial records. The clients who experience the smoothest claims are those who have their documentation in order from day one.
Here is what you do:
With proper evidence and documentation, income protection claims in Australia have a strong approval rate. The key is making sure your medical evidence clearly supports your inability to work and that your financial records accurately reflect your pre-disability earnings.
The premiums you pay for income protection are calculated based on your age, occupation, the amount of cover you need, and your chosen benefit period. Higher risk occupations and longer benefit periods result in higher premiums, and self-employed individuals may also pay more due to the variable nature of their income. From what we see, self-employed clients are often the most underinsured group we come across, frequently assuming income protection is not available or not affordable for them when in reality it is both.
Taking advice from a specialist before selecting your policy ensures the premiums you pay reflect the right level of cover for your situation.
As a general guide:
To be eligible, you generally need to be an Australian resident and engaged in eligible employment. Some policies have no upper age limit, so it is worth seeking advice on what is available to you regardless of your age.
Income protection and TPD serve different purposes and ideally work together rather than as alternatives to each other. Income protection is defined as a policy that protects your income on a monthly basis, replacing your earnings until you recover or your benefit period ends. It is designed for situations where you are temporarily or partially unable to work.
TPD pays a one-off lump sum if you meet the definition of being totally and permanently disabled and unable to ever return to work. It is designed for life-changing permanent conditions rather than temporary illness or injury. For most people holding both is the strongest position as they protect against different financial risks at the same time.
