The short answer is yes, provided the benefit from the insurance policy is taxable.
The real question to ask is: is your income protection insurance taxable?
Indemnity or Loss of Earnings Insurance
A claim made against an Indemnity or Loss of Earnings policy relates directly to the loss of income and the pay-out is based on a percentage of prior earnings. As the claim relates directly to the loss of income, the pay-out is taxable as it is deemed to be a replacement of income. Therefore you are able to claim a tax deduction for the premiums paid. Your insurance provider should send you a year-end summary of the tax deductible premiums you can claim.
Agreed Value
In the event that the value of any cover is agreed prior to a claim being made, the claim does not directly relate to the loss of income but instead relates to an inability to work. Therefore, the claim is not tax assessable because it is not a replacement of income – it is cover for the inability to work.
However, if you take a tax deduction for the insurance premium paid, then the proceeds on a claim become tax assessable.
If you have been advised on a level of Agreed Cover based on your current income and/or outgoings, this level of cover may not take into account any tax due to be paid out of the claim if you are claiming a tax deduction on the policy payments.
Please contact us if you have any queries regarding your income protection insurance tax deductions.
Erin Gibson is a Senior Accountant at UHY Haines Norton.