Most of us insure our homes, our cars, even our pets. But how many people take out insurance on the income that supports their entire lifestyle? In Australia, the average full-time salary is over $98,000, which means most people earn over $2 million across their working life. That’s a huge asset and yet thousands of Australians leave it unprotected.

This is where income protection insurance steps in. If you’re unable to work due to illness or injury, this insurance can replace up to 70-75% of your income, helping you stay on your feet financially.

What Income Protection Insurance Covers

The below chart illustrates the most common causes of income protection claims in Australia, many of which affect everyday Australians unexpectedly and without warning.

Based on aggregated industry data shared on Aussie Income Protection Insurance

Tax Benefits: What the ATO Lets You Claim

Let’s look at this through James’ story.

James, a 38-year-old self-employed designer, pays for income protection out of his own pocket. When tax time comes, he claims a tax deduction for the premiums, reducing his taxable income.

Later, James injures his back and is off work for 3 months. His policy pays him 70% of his usual income. But come tax time, he finds out the payments he received are taxable and must be declared in his return. His insurer withheld some tax, which softens the blow.

Here’s the catch:

• If James had bought the insurance through super, he wouldn’t be able to claim the premiums as a tax deduction.
• If the policy was bundled with life, TPD or trauma cover, only the income protection portion would be deductible.

In summary:

• Premiums are tax-deductible (outside super). Each year your insurance provider will provide you with a letter advising the tax-deductible portion of your income protection insurance policy.
• Payments are taxable income. You should receive an annual statement from the insurer showing the total amount paid and any tax withheld.
• Super held policies don’t provide personal deductions.

The True Cost of Not Having Income Protection Insurance

Here’s what can happen if you don’t have income protection:

• You could face months without income during illness or injury
• No tax deduction benefit to help ease your yearly tax bill
• Your savings and super could be drained early
• Financial stress may worsen your recovery

Worse still, many Australians rely on government support, which is often not enough to cover mortgage payments, private health care, or dependants.

In Summary:

Think of income protection not just as insurance, but as a key part of your overall financial security.

• It provides a steady stream of income when you’re unable to work due to illness or injury
• Premiums may be tax-deductible when the policy is held outside of super
• It reduces your reliance on Centrelink, personal savings, or early access to superannuation

What to Consider Moving Forward

If your income stopped tomorrow, how long could you keep up with your mortgage, bills, or daily expenses?

If the answer is “not long,” it may be time to view the income protection not just as a safety net, but as a core component of your financial foundation.

Always seek guidance from a qualified financial advisor to determine whether income protection is suitable for your personal circumstances.