Making the correct insurance policy choices is critical to ensuring that you are fully covered in the event of an illness or catastrophe.
While we all require personal insurance, the stakes are higher for business owners, including those in the travel industry.
Consider the distinctions between income protection, trauma coverage, and key person insurance. Then we’ll look at how you might be able to file a claim for the same insurable occurrence under many insurance policies.
According to Kevin Feaver, a life insurance agent, the bulk of claims are for an income protection policy, which pays out if a person is unable to work in his or her own business due to an accident or illness.
“This is typically a monthly benefit that pays up to 75% of the owner’s wage package. Self-employed people face a hurdle in showing their income on applications because it varies from year to year. However, if sufficient financial documentation is provided at the time of application, such as accountant reports and tax returns, an agreed value contract may be achievable, with some insurers needing two years’ worth of proof. If the illness or disability lasts that long, monthly benefits are usually extended until age 65,” Kevin explains.
Income protection policies normally have a waiting period, with payouts starting 30 or 90 days after the claim is filed, and occasionally as long as two years depending on the circumstances of the business owner. A two-year waiting time, for example, only applies to policyholders who have a two-year benefit term salary continuance insurance in their superannuation.
“Premiums are usually tax deductible, and there is no need to pay a fringe benefits tax. Any benefits obtained from the policy, on the other hand, are included in the owner’s taxable income,” Kevin explains.
A business owner wears two hats: one is the owner of the company and the other is the manager of the company “the self-employed and the individual” When you think of a business owner, you should think of him or her as a “He or she may have personal or family expenses to keep up with, such as a mortgage, credit card, school fees, and auto payments. On identification of a certified medical condition as a result of an accident or sickness, trauma insurance typically pays a flat payment. Cancer, a heart attack, a stroke, or a condition like quadriplegia are the most common claims lodged against a trauma policy.
Despite the fact that trauma insurance often cover 30 to 40 different ailments, Kevin estimates that over 80% of claims are related to cancer, heart attack, or stroke.
“Payments are made in one lump sum, and there is no tax due on the payout, however the premium paid by the individual is not tax deductible,” he explains. “When considering trauma insurance for the self-employed and the financial commitments associated with that area of his or her life, this type of coverage would be included as part of a key person policy,” Kevin explains.
This sort of insurance is typically unique since it combines several various types of insurance, such as life, total and permanent disability (TPD), and trauma insurance. It is usually directed towards someone who is involved in and important to the firm, such as the owners or key staff.
“The money that the key person would have generated is replaced by key person insurance, which aids in the business’s stabilization and continuation. They might have $3 million in life insurance, $1 million in TPD, and $500,000 in trauma insurance, for example,” he explains.
Premiums are tax deductible for the business, and proceeds are taxed at the company tax rate as long as the policy’s aim is to protect the business’s revenue.
Business expense insurance is a type of coverage that, in some cases, can give additional protection by covering salary, rent, and utilities.
Let’s look at how three distinct forms of insurance might handle a hypothetical claim: income protection, trauma, and key person.
Karen, a travel company owner, has purchased trauma insurance as well as income protection insurance. She has also purchased key person insurance because she is so important to her company’s operations. Karen, unfortunately, had a heart attack and is unable to return to work.
She would be allowed to make a claim under her income protection policy because she is unable to return to her old position within the company. According to Kevin, the waiting period for reimbursements associated to an income protection policy is frequently waived in the event of a heart attack. In this circumstance, she is likely to obtain a lump sum payout under her trauma policy, as well as a claim under her key person insurance.
“The three policies would respond in this claim scenario if Karen reported all previous policies at the time the policies were started,” Kevin says.
“Most policies are guaranteed renewable, so there is no risk in filing a claim,” Kevin explains. “But, in any case, it’s a good idea to get advice from a life risk professional when it’s time to file a claim,” he says.
Since 1964, Gow Gates Financial Services has provided insurance assistance to business owners, self-employed individuals, and salaried staff. For many years, we have been honored to be specifically associated with the Travel Industry.
Apogee Financial Planning (ABN 28 056 426 932), an Australian Financial Services Licensee with its registered office at 105 153 Miller Street, North Sydney NSW 2060, is an authorised representative of Gow-Gates Financial Services Pty Ltd (ABN 97 001 250 344).
Disclaimer: Because this post offers generic advice that has not been personalized to your specific circumstances, the information in this article may not be appropriate for you. Before acting on this material, please obtain personal financial advice.
The hypothetical claims scenarios presented here are hypothetical in nature and should not be used to determine any specific facts or situations. Actual claims are subject to individual claims review by applicable insurer representatives and are regulated by the specific policy terms, restrictions, limits, and exclusions. Tax, accounting, and legal statements should be interpreted as general observations based purely on our expertise as insurance advisers and should not be construed as tax, accounting, or legal advice, which we are not authorized to offer. All of these issues should be discussed with your own qualified tax, accounting, and legal professionals.
Can you claim trauma insurance as a tax deduction?
No, in most cases. Premiums on insurance plans purchased through super accounts are not tax deductible, according to the Australian Taxation Office (ATO).
This is because the insurance is paid out of your superannuation account rather than your salary. As a result, any life insurance purchased through your superannuation fund is not tax deductible.
If you have a self-managed super fund, though, this may be different. It’s important to speak with a tax professional or financial adviser about claiming tax deductions on insurance premiums inside a self-managed super fund.
Is life insurance tax deductible outside of super?
No, most of the time. Outside of super, life insurances such as death cover, TPD, and trauma insurance are normally not tax deductible.
Income protection insurance premiums, on the other hand, are tax deductible if purchased outside of a super fund. This is because the premiums you pay are based on your earnings.
Insurance premiums aren’t tax deductible if the policy gives a benefit for bodily injury, according to the ATO. So everything except income protection insurance is ruled out.
Are life insurance benefits taxed in Australia?
This is determined by the sort of policy you choose. You’ll almost certainly have to pay tax on the monthly benefits you receive from income protection insurance, just as you would with ordinary income.
Other life insurance policies, on the other hand, are normally tax-free. The payment will almost certainly be tax-free if it is provided to a financial dependent, such as a spouse or child. Life insurance (death cover), trauma insurance, and total and permanent disability insurance are all examples of this.
The only exception is when life insurance is obtained through a super fund and the benefit is paid to a non-financial dependent adult. In that situation, the beneficiary’s tax-free status could be revoked, and he or she could face a tax of up to 30%.
What insurances are tax deductible?
Any out-of-pocket health insurance premiums for coverage that cover medical care are tax deductible. (Medical insurance coverage, with few exceptions, cover hospitalization, surgery, and X-rays, as well as prescription medications and insulin, dental care, lost or broken contact lenses, and long-term care.) You can deduct these expenses for yourself, your spouse, and your dependents when filing your taxes.
Premiums for COBRA insurance, as well as Medicare Part B and D premiums, are tax deductible. Premiums paid for Medicare A are also tax-deductible if you are not enrolled in Medicare through Social Security and are not a former government employee who paid Medicare tax.
Any premiums you pay out of pocket for health insurance purchased through the federal insurance marketplace or your state marketplace are tax deductible.
You can deduct the amount you spent for health insurance and eligible long-term care insurance premiums directly from your income if you are self-employed. This decreases your tax burden by lowering your adjusted gross income (AGI). Medical and dental expenditures may be deducted as itemized deductions on Schedule A of IRS Form 1040.
However, whether you’re employed or self-employed, you can only deduct medical expenses that exceed 7.5 percent of your adjusted gross income.
Are trauma recovery benefits taxable?
Individual policy owners should normally be tax-free on benefits obtained from claims filed under other types of life insurance, such as life cover, TPD, and recovery (trauma) insurance.
What is covered under trauma insurance?
Trauma insurance, often known as ‘critical illness’ or’recovery insurance,’ provides a lump sum payment if you are diagnosed with a critical illness or suffer a major injury. Cancer, a heart problem, a significant brain injury, or a stroke are all examples of this. Mental health disorders are not covered by trauma insurance.
What is covered by a trauma insurance coverage, as well as medical definitions, vary by insurer. Read the product disclosure statement to learn more about what a trauma insurance policy covers (PDS).
Is crisis recovery insurance tax deductible?
Premiums for Crisis Recovery insurance can be paid by direct debit monthly, half-yearly, or yearly, and may be tax deductible. This type of policy’s premiums cannot be paid from a retirement account.
What medical expenses are not tax deductible?
Cosmetic surgery, gym memberships or health club dues, diet food, and non-prescription medicines are examples of non-qualifying medical expenses (except for insulin).
Only medical expenses paid out of pocket during the current tax year are deductible. Credit card payments may be included in the year in which they are made. Except for a qualifying relative, you can’t deduct the expense of a monthly medication that was paid for by someone you don’t file taxes with or that was later reimbursed by your health insurance provider. You also can’t claim a medical expense if you paid for it with money from a flexible spending account or a health savings account because the money was put in before taxes.
Cellphones have become as important to business as a land line, making them a genuine, tax-deductible business expense. However, because cellphones are intricately linked to our personal lives for most of us, the IRS scrutinizes this deduction closely to ensure that personal electronics aren’t being claimed as a business expenditure.
Your cellphone as a small business deduction
You can claim the commercial usage of your phone as a tax deduction if you’re self-employed and use your mobile for business. You might properly deduct 30% of your phone cost if you spend 30% of your time on the phone on business. Writer Kristin Edelhauser of “Entrepreneur” magazine suggests acquiring an itemized phone bill so you can track your company and personal usage and justify your deduction to the IRS. You might also get a second phone number and use it solely for business purposes.
Deductions for employees
Even if you work for someone as an employee, you may be required to use your personal smartphone for business purposes for tax years prior to 2018. If you itemize your deductions, the IRS permits you to claim depreciation on your phone as a “unreimbursed business expense” if you use it for work on a regular basis and it’s a typical, accepted business practice.
Unreimbursed business expenses that total more than 2% of your adjusted gross income can be deducted. Professional association dues, legal costs, and other expenses indicated in IRS Publication 529 are included in this category.
These and other unreimbursed employee expenses are no longer deductible as of 2018.
Cellphone depreciation
According to Schneider Downs, the Small Business Jobs Act of 2010 affects the way you compute cellphone depreciation. If you used your cellphone for business less than 50% of the time, you could only depreciate it on a straight-line 10-year depreciation schedule under the prior regulations. However, the law now permits you to write off depreciationthe reduction in value caused by wear and tearover a seven-year period, as well as making bonus depreciation easier to claim.
Your cellphone as fringe benefit
If your company provides you with a cellphone as part of your job, your taxable income could increase. According to Schneider Downs, if you use your smartphone even significantly for personal calls, you have a fringe benefit that must be included in your gross income.
If you can show that you use a personal cellphone during business hours and make all of your personal calls on it, the IRS may find that the business phone is used solely for business purposes, in which case your income will not be affected.
Can I claim income protection insurance on my tax return?
The only part of your insurance premium that qualifies for a tax deduction is your income protection insurance. As a result, you won’t be able to claim deductions for other parts of the bundled policy, such as life or trauma insurance.
Why is trauma insurance so expensive?
When compared to Life or TPD Insurance, Trauma Insurance is more expensive since it is more likely that someone will file a claim. Many of the situations covered by Trauma would not result in a TPD claim since they are more likely to be transient.
What is the difference between TPD and trauma insurance?
If you or a loved one is involved in a major accident or sickness, it’s critical that you and your family focus all of your efforts on getting healthy, rather than worrying about expenses building up.
Trauma insurance, also known as Recovery or Critical Illness insurance, can help in this situation.
Trauma insurance covers you if you get dangerously ill or injured and require extensive medical treatment to recover, such as cancer or a heart attack.
The first is Critical Injury Cover, which pays for help and treatment if you suffer a critical injury such as a catastrophic head trauma, severe burns, or blindness.
Critical Illness Coverage is the second option. Critical Illness Cover enables you to pay for medical treatment if you have a heart attack or stroke, acquire alzheimers or a blood problem, or require a major organ transplant.
Finally, if you’re diagnosed with specific malignancies, such as melanoma, benign and malignant tumors, breast cancer, or early stage prostate cancer, Cancer Cover can help.
Unfortunately, there are some accidents and illnesses from which you will never recover, despite the greatest efforts of leading medical specialists and your own pure resolve.
You may be unable to work again if you suffer a spinal cord injury, lose a limb in a vehicle accident, or develop Motor Neurone Disease.
Where would your family be if you weren’t earning money to pay off debts, pay for in-home care, or just cover the expense of living for the next 10, 20, or 50 years?
TPD Insurance was created to help with this. If you become permanently incapacitated due to disease or accident and are unable to work, it replaces your income with a lump sum payment of up to $1.5 million.
You can also pick between an insurance that covers you if you can’t work in ‘Any Occupation’ or a policy that protects you if you can’t return to your ‘Usual Occupation.’
Trauma Insurance, in a nutshell, pays for the costs of getting you healthy and back to work.
TPD Insurance, on the other hand, will ensure that you and your family maintain a good quality of life if your injury or sickness is so serious that you will never be able to return to work.
Because you never know what can happen, having both types of insurance helps you to stop worrying about the “what ifs” and focus on enjoying your much-loved Australian lifestyle.