Is Income Protection Insurance Tax Deductible?
Yes, income protection premiums may be allowed as a tax deduction if the insurance pay-out would be taxable.
Find the Best Income Protection Plan for You
Get free quotes and compare life insurance policies.
Loss of earnings/profits insurance tax deductions
A loss of earnings or profits insurance policy is one where any benefits are calculated with reference to income lost by the insured due to incapacitation.
Inland Revenue’s¹ (IR) view is that benefits from this type of policy are taxable.
However, the premium costs paid are tax-deductible, which means the person can claim them as an expense in their tax return, reducing their tax payable or potentially creating a refund.
This is the case even if the person is an employee.
This treatment may also extend to premiums paid under an extended disablement policy that pays a benefit in the form of a weekly income calculated according to lost income.
An employee in a building business takes out a policy that provides for the lesser of:
- the agreed amount of cover, which is a dollar amount specified in a schedule to the policy, or
- 75% of average weekly income.
Average weekly income is the higher of the following amounts:
- the weekly average in the 12 months prior to disability, or
- the weekly average in any 12 months in the three years prior to the disability.
The employee also pays for a premium waiver benefit.
This means that premiums are not payable during the period the employee is disabled and claiming under the policy.
Under IR’s policy, this is a loss of earnings insurance policy.
Benefits are calculated at the time of a claim and in relation to earnings. The employee can deduct the premiums paid and must pay tax on any economic benefits received.
The premium waiver benefit does not give rise to income and has no tax consequences.
To learn more about deducting your ‘loss of earnings’ insurance, and claiming other relevant expenses, talk to Angela at NZ Tax Desk now.
Specialist tax recommendations and advice.