Is Income Protection taxable?
In New Zealand Income Protection Insurance benefit is taxable in accordance to the current law. However some accountants would disagree with this statement with the following logic: Income Protection Insurance is purchased with tax free dollars therefore the benefit should be free of tax.
Is Income Protection taxable? Yes.
In my opinion the questions does not have a simple straight forward answer due to the following reason: Everyone’s claim situation is different and the structure how the premiums are or were paid and how the benefit is going to be treated by IRD. Therefore there is no “one fit all” answer. However it is better for your future income planning to think that if you are going to be on claim with your income protection your income protection benefit is taxable.
Why when people ask: Is Income Protection taxable? I answer – Yes.
When I get the question “is Income Protection taxable?” I always answer “Yes” as any other types of your income. If you had second income would that income be taxable? – “Yes”. The answer can change only if your insurer says that the benefit is going to be tax free- then you should ask “how”. I am going to explain further down why I think it is not possible to have Income Protection non-taxable.
Think about your Income Protection benefit as a reduced form of your main income and as the result of your sickness being reduced to either 75% of you pre-disability income or to 55% of your pre-disability income. Since it is income – it is taxable. If due to your accountant work with IRD the benefit is going to be treated as non-taxable it just means you get more money from your Income Protection Insurance.
If you want to discuss your Income Protection please let me know by using this form:
In New Zealand there are two formulas of how income protection benefit is calculated. You, get to choose at the time of application how you want to get paid in the event you are seriously sick.
- Indemnity structure pays 75% of your pre-disability income.
For instance your current monthly income is $10,000 therefore if you seriously sick the income protection benefit is going to be $7,500 minus tax. Indemnity means that at the time of application your insurer is not going to ask for proof of your income. The insurer will ask you to proof that you were getting $10,000 monthly only at the time of claim. This type of income protection benefit is generally cheaper to compare to “Agreed” structure.
- Agreed structure pays 55%.
Same example as above: your monthly income is $10,000 at the time of application your insurer is going to ask you to proof that you are getting $10,000. Once the underwriting is completed you are going to be provided with “Agreed” value income protection insurance which is going to pay you 55% of your pre-disability income. In our example it is going to be $5,500
Important factor is to see Income Protection Insurance from the insurer point of view: – insurance companies want to create additional force which is going to make you to come back to work by decreasing your level of income and this is why the highest Income Protection level is 75%.
The logic here is: if you know that you can get your income (same level as before disability) you are going to get through re-hub period sooner.
Majority of insurance companies would come to the party and provide the person insured with access to the best medical practitioners to help the person to get out of the claim as soon as it practically possible.
Think about your Income Protection Insurance as a complex solution which is designed to help you to have enough money in event you are seriously sick. Please let me know if you want to discuss your Income Protection requirements and I will be happy to provide you with income protection structure addressing your personal needs & wants taking into account your goals. By goals I mean if for instance you are planning that your toddler is going to attend private school income protection benefit should allow you to have that.
At our meeting we will discuss what you want to protect now and what should be protected in the future. If your Income Protection Insurance is structured the way it is addressing all possible scenarios you know your future financial security is sorted by you right when everything is just fine.