Income Protection & Tax: why “I’ll do it later” costs more

Most people insure their house and car, then cross their fingers on the one asset that pays for everything: their income. The usual logic? “I’ll sort it later.” Here’s why later is often pricier, riskier, and less tax-efficient — and how to set it up simply.

The 60-second version

• Income Protection (IP) replaces part of your income if you’re too sick or injured to work.

• Premiums are generally tax-deductible when the policy is in your name and pays monthly benefits (outside super).

• Waiting = higher premiums later (you’re older), potential medical loadings/exclusions, and no cover if something happens in the meantime.

• A few smart settings (waiting period, benefit period, stepped vs level) can halve the long-term cost without gutting your safety net.

“But IP is expensive, right?”

It can be, but you have options when setting up your cover. Price depends on:

1. Waiting period (how long you self-fund before benefits start): 30/60/90 days (longer the wait = cheaper).

2. Benefit period (how long it can pay): 2 years, 5 years, to age 65/67 (shorter the benefit = cheaper).

3. Stepped vs level premiums

   • Stepped: cheaper now, rises each year with age.

   • Level: higher now, doesn’t rise due to age (still indexed). Good if you’ll hold long term.

4. Occupation, income, smoker status, health (underwriting).

Quick reality check: the cost usually sits between 0.5%–2% of salary for a sensible design. That’s often recoverable at tax time (see next).

The tax win (and why structure matters)

• Premiums are typically tax-deductible for personal Income Protection held outside super (because benefits are taxable when paid).

• Inside super, the fund may claim the deduction, but the product features can be more limited and claim times more fiddly.

Simple example (outside super): Annual premium: $1,800

Your marginal tax rate (incl. Medicare): 34.5%

Tax saving: $1,800 × 34.5% = $621

After-tax cost: $1,179 (≃ $22 per week)

That’s usually cheaper than most people expect — especially compared with the cashflow hit of a 3–6 month recovery without income.

Why waiting costs more (even if you never claim)

1. Age creep: every birthday, stepped premiums climb. Start at 36 vs 41 and you’ll feel it.

2. Health creep: new niggles = loadings or exclusions (or flat declines). Sorting cover while healthy avoids the response of “we’ll cover you — except the thing you need.”

3. Market creep: insurer repricing happens. Today’s rate can be tomorrow’s bargain.

4. Opportunity cost: premiums you could have deducted this year are gone forever.

How to make IP affordable without making it useless

Think of it like designing a parachute:

• Pick a waiting period you can truly self-fund.

  • If you’ve got 3 months’ expenses in the offset, a 90-day wait is a smart trade-off.

  • No buffer? Start at 30 or 60 days, then extend later once the offset is healthy.

• Choose the benefit period on purpose.

  • To age 65/67 is the gold standard (covers long recoveries).

  • 2–5 years can be a cost-effective bridge if your job is resilient or you have strong back-ups (partner income, business cover).

• Stepped now, level later (or mix):

  • If cash is tight, start stepped to get on cover.

  • Once you’re comfortable, switch to level to lock in the long-term cost.

• Insure the income you actually rely on.

  • Don’t over-insure. Target the after-tax spend you must cover.

  • Add claim-time boosters that matter: own-occupation (if available), partial disability benefits, indexation.

“Don’t I have something in super already?”

Maybe — but default IP in super is often basic (shorter benefits, generic definitions). If you rely on your salary, it’s worth a proper review. You can:

• Replace or top up outside super for better definitions, or

• Keep a bare-bones backup in super and tailor the main cover outside.

When to revisit (life events checklist)

• Pay rise or change in job duties

• New mortgage / bigger debts

• Starting a family

• Health changes (before they get into your medical file)

• Moving from full-time to contractor/self-employed

The “do it now” plan (simple and done)

1. Pick a sensible wait (what your offset covers) and a benefit period that actually protects your household.

2. Start stepped if needed; schedule a switch-to-level review in 12 months.

3. Keep it outside super for tax deductibility and better features (case by case).

4. Automate an annual review: if the offset grows, consider extending the waiting period to trim cost.

Bottom line

“I’ll do it later” sounds harmless until later is older, more expensive, and harder to insure. Set a workable Income Protection now, claim the tax deduction, and sleep knowing your lifestyle isn’t riding on good luck.

General information only. It doesn’t take your objectives, financial situation or needs into account. Consider the PDS and seek personal advice before acting. In Australia, Income Protection premiums are generally tax-deductible when held personally; specific tax outcomes depend on your circumstances.

Click HERE to schedule a chat and discuss your individual circumstances in more detail.