Guide · Insurance
Income protection, explained
Income protection pays part of your income if illness or injury stops you working. It can sit inside your super fund or outside it, and the tax treatment is different. This page sets out the rules from the ATO and Moneysmart. It doesn’t name an insurer or say whether you need cover.
What it is
Moneysmart says income protection usually replaces a percentage of your pre-tax income (for example 75% or 90%) while you can’t work because of illness or injury, based on what you earned in the 12 months before.
Moneysmart, Income protection insurance (updated 17 Sep 2026) ↗
Inside super vs outside super
Who pays the premium
Inside super
Taken from your super balance, which reduces your retirement savings.
Outside super
You pay from your own money.
Is the premium tax-deductible for you?
Inside super
No. The ATO says you can’t claim a deduction if the policy is through your super fund and the premiums are deducted from your contributions.
Outside super
Generally yes, for the part that insures your salary and wages. Cover for a lump sum (life, trauma, injury capital sums) isn’t deductible.
Are payouts taxed?
Inside super and outside super
Yes. The ATO says a payment that replaces salary and wages under an income protection policy goes in your tax return, whether it’s paid regularly or as a lump sum.
Getting cover
Inside super
Some funds give default income protection automatically, usually without medical checks, for a set amount.
Outside super
Insurers usually ask about your job, income, medical and family history, smoking and hobbies.
Amount and features
Inside super
Default cover may be lower than you could get outside super.
Outside super
Moneysmart says policies outside super might allow a higher amount of cover, with more features and benefits.
When cover can stop
Inside super
By law, funds cancel insurance on accounts with no contributions for at least 16 months, after contacting you. Cover also doesn’t start automatically for new members under 25 or with balances under $6,000, unless you ask or work in a dangerous job.
Outside super
This depends on the policy terms. Check the PDS for when cover ends.
A tax-time detail for 2026–27
Income protection premiums you pay outside super don’t reduce the new $1,000 standard deduction for work-related expenses. The ATO lists them among the deductions you claim as usual. They also need records.
ATO, Standard deduction for work-related expenses (updated 14 Sep 2026) ↗
See it in the tax calculator → (the premium goes in “Other deductions”).
What to read in a policy
- Waiting period. How long before payments start. “Most policies offer between 14 days and two years.”
- Benefit period. How long payments last. “Most offer two or five years, or up to a specific age (such as 65).”
- Premium type. Age-stepped premiums are recalculated at each renewal as you age. The other type starts higher, and its increases aren’t based on age.
- Definition of disability. “Each policy has its own definition of disability and conditions that must be met before a claim.”
- Minimum work hours. “Some policies only cover you if you work a minimum number of hours (for example, 15 hours) a week.” This is worth knowing for part-time and fractional appointments.
- Exclusions and loadings. Read the product disclosure statement (PDS). With cover through super, check what happens if you change jobs or your account goes inactive.
Moneysmart, Income protection insurance (updated 17 Sep 2026) ↗
Claims data from the regulators
APRA and ASIC publish life insurance claims and disputes statistics, including for income protection (disability income insurance). Moneysmart has a claims comparison tool by insurer.
Related on this site
Included / Not included
Included
- ATO rule on when income protection premiums are deductible, and that payouts are taxable · ATO, updated 8 Jun 2026ATO ↗
- Inside vs outside super differences as described by Moneysmart · updated 17 Sep 2026Income protection insurance ↗Insurance through super ↗
- Default cover rules: 16 months inactive, under 25, balance under $6,000 · Moneysmart, updated 17 Sep 2026Moneysmart ↗
- How premiums interact with the $1,000 standard deduction · ATO, updated 14 Sep 2026ATO ↗
Not included
- Quotes, premiums or any insurer or fund name
- A ranking or comparison of policies
- Whether you need cover, or how much
- How a particular fund’s or insurer’s definitions, exclusions or offsets work
- Tax on super insurance payouts beyond the ATO statement above
General information only, not personal financial or tax advice. Read the PDS and the fund’s insurance guide for the policy terms. Last checked 17 Oct 2026.
A rough figure — not advice. Terms
Advertisement — labelled, never inside the number.