Understanding Income Protection Insurance and Tax Deductions

30 May 2024 by Lifetime in Accounting, Insurance

Understanding Income Protection Insurance and Tax Deductions

Whether you're a business owner or earning a salary, income protection insurance can offer valuable financial security in uncertain times. But did you know that you may also be able to claim the cost of your income protection insurance as a tax deduction?

Here's what you need to know:

Is Income Protection Insurance Tax Deductible?

The short answer is yes, but it depends on whether the insurance payout would be taxable income for you. This type of insurance is also known as 'loss of earnings' insurance.

When Can You Claim?

You can claim the cost of your income protection insurance as a tax deduction if the insurance payout would be taxable. This can be done under 'non-business expenses' in your end-of-year assessment.

By understanding the tax implications of your income protection insurance, you can make informed decisions about your financial security and ensure you're maximising any potential tax benefits available to you.

Types of Income Protection Insurance

There are two main types of income protection insurance: indemnity (or loss of earnings) insurance and agreed value insurance.

Indemnity Insurance: If your insurance pays out based on your lost income, then the payout is taxable. You can deduct the premiums you pay for this type of insurance from your taxes.

Agreed Value Insurance: If your insurance pays out a set amount agreed upon before you make a claim, then the payout isn't taxable. However, if you claimed a tax deduction for the premium, then the payout becomes taxable.

How to Claim (if you are not in business):

  1. Request Tax Certificate
    Contact your insurance provider to find out if your income protection insurance is tax deductible. If it is, request your tax certificate. Alternatively, if you are an existing Lifetime client and we advise on your insurance policy, let us know you would like to enquire and we can do this step on your behalf.
  2. File With IRD
    Once you have your tax certificate, you can file it with the IRD as a non-business expense. Log into your myIR account, navigate to “I want to…” and then scroll to "My income sources" under "My income," and add your tax certificate under "Non-business expenses."

By understanding the tax implications of your income protection insurance, you can make informed decisions about your financial security and ensure you're maximising any potential tax benefits available to you.

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.

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