Income Protection is tax deductible. It is a type of insurance that will provide an income at the time of claim (which is taxable) and therefore you should be able to claim a deduction for all premiums paid. Like any financial investment which has the purpose of generating future income, there are tax benefits associated with the payments.
There has been a push recently by industry superannuation funds for members to hold Income Protection within the superannuation environment however it is important to note the after tax position when making your decision.
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Income Protection is tax deductible to the fund when held within superannuation (just as it is tax deductible to the individual when self-owned). The superannuation environment is concessionally taxed at 15% as opposed to outside where personal tax rates are up to 45%. Therefore less of a deduction is possible when held inside super. Most funds do not enable tax returns at individual account level and therefore the deductible amount is passed on as premium savings to the policy holders in the fund.
Based upon simply the after tax cost of the insurance, it will always be better to hold your Income Protection outside of the superannuation environment. Obviously as premiums are deducted from your superannuation savings, this will deteriorate your retirement balance quite dramatically if you are not making additional contributions to your fund.
There are some optional benefits available with Income Protection such as a TPD option that will render your policy not deductible to an extent.
For example Tower Australia offers a Critical Illness option that will pay a non-taxable lump sum in the event of the life insured suffering a traumatic illness. This option when applied to your policy renders your Income Protection premium 93% deductible.