Income protection insurance, also known as sickness and accident insurance, provides an employee with monthly income payments to replace their salary income when they are off sick from work due to sickness or accident.
Over 7 million Australians have an income protection policy and claimed over $1.1 billion in 2015.
When an employee goes to the bank to get finance (whether for their private residence, investment property, or motor vehicle), the bank often makes it compulsory that they take on the bank’s income protection insurance policy as well. This provides greater security to the bank that the loan repayments will still be made even if the employee is sick or has an accident and is off work.
Each income protection policy has its own definition of disability, range of benefits, and conditions. Income protection usually offers cover for up to 75% of your gross wages for a maximum time period (e.g. two years or to age 65). Policy holders also need to consider what waiting period they require. This is the period of time, often 30 to 90 days, before they can make a claim.
The monthly income protection insurance payments received under the insurance policy replace the employee’s salary income and are taxable. Exactly like an employee’s normal salary income, PAYG tax is deducted by the insurance company from the gross insurance payments. At year end the employee receives a payment summary from the insurance company showing their gross income for the year and PAYG tax deducted.
The cost of the insurance premiums for the income protection insurance is tax deductible and claimed at D15 in the tax return.