Is Income Protection Taxable?

When it comes to income protection insurance in New Zealand, understanding tax implications can feel like solving a Rubik's Cube blindfolded. Let’s simplify the details so you can make informed decisions about your financial protection and avoid unexpected surprises. If you want to better understand your specific situation with income protection it's best to speak to an independent insurance adviser.

Is Income Protection Taxable in New Zealand?

Yes ... and no. It depends on the type of policy that you have.

Indemnity income protection insurance claims are taxable in New Zealand as they replace lost income. These payments count as taxable income because they serve as a substitute for your regular earnings. There is a silver lining to this particular cloud as the premiums are tax deductible.

This isn't the case for Agreed Value Income Protection Policies where the claim is not taxable, however there are no tax breaks on the premium.

Indemnity vs. Agreed Value Policies: What’s the Difference?

• Indemnity Policies: These pay up to 75% of your pre-disability income. Since they mimic your regular earnings, they’re taxable.
• Agreed Value Policies: These pay a fixed amount that you and your insurer agreed on, up to 62.5% of your income when you set up the policy.

What About Mortgage Cover?

Mortgage repayment insurance is often discussed alongside income protection but works slightly differently. It’s usually not taxable.

Are Income Protection Premiums Tax-Deductible?

As mentioned above the premiums for indemnity income protection can be tax deductible. For the self-employed this can be organised with the accountant but for the employed this may mean login in to the IRD website.

Why Reviewing Your Insurance Matters

When Income Protection is first put in place it will reflect the salary at that time. As people's salaries generally increase it is important that the income protection keeps pace. This is why it is critical to regularly review income protection. It may even be possible to increase cover without the need for underwriting. Whether you’ve got income protection insurance, mortgage cover, or another type of policy, a regular review ensures your cover stays relevant and effective.

Get Your Policy Reviewed with Cover Yours Insurance

Not sure if your income protection insurance or other policies meet your needs? Contact Cover Yours Insurance for a no-obligation review. We’ll help you understand your options, ensure your cover aligns with your financial goals, and navigate the finer details of income protection insurance in New Zealand.

📩 Email us at marc@coveryours.co.nz
🌐 Visit coveryours.co.nz/contact/

Disclaimer: This guide provides general information and is not a substitute for professional tax advice. Always consult a tax specialist for advice tailored to your situation.

Cover Yours Ltd (FSP769531) and Marc Hamilton (FSP306046) are registered Financial Service Providers and you can search the register here. Marc Hamilton is a member of the FSCL Disputes Resolution Scheme. Cover Yours Ltd and Marc Hamilton’s disclosures can be found here or by emailing marc@coveryours.co.nz