Reader question: Are income protection insurance benefits taxed?
The answer to this question would really depend on the type of policy and who pays the premiums, let me explain.
What is income protection insurance?
- income protection insurance is a type of sick pay insurance that pays out a pre-agreed amount on a monthly basis if the insured is unable to work due to accident or illness
- benefits from an income protection policy will normally continue until the insured returns to work or retires
- the maximum level of cover under an income protection policy is limited to around 60-70% of your gross monthly salary
- setting up an income protection policy will require completion of a health questionnaire with premiums set accordingly
Personal income protection policy
- this is an income protection policy that has been arranged by the insured person
- all premiums are paid by the insured
- benefits paid under this type of income protection policy are paid totally free of income tax
Executive income protection policy
- this is an income protection policy arranged by a company usually for its senior personnel
- premiums on this type of policy may be paid by the employer, employee or both
- if the income protection premiums are paid by the employer then benefits would be taxed as income
- if the income protection premiums were paid by your employer but you paid the tax on these premiums then any benefits would not be taxed as you would have effectively paid the premiums out of your taxed income
- if you paid all or part of the premiums on this type of income protection policy then tax will be levied, in the same proportion, on any benefits paid
- for example if you paid 50% of the monthly premium then you will be taxed on 50% of the benefits paid
- benefit levels available are higher (up to 80% of your gross salary) which means the employee still receives close to what they earned after tax
Group employee income protection policy
- this is an income protection scheme that provides an income for employees registered within the scheme
- employees with income protection through a group scheme are paid the benefit through the employer
- the insurance company pay the benefit to the employer and the employer pays this in their normal payroll
- the employer pays for the scheme which normally forms part of their benefits scheme for employees
- the benefit is taxed in the way that your income would be taxed
How to find the best income protection policy for you
I would always recommend that you speak to a firm specialising in income protection and life insurance. To receive free, impartial advice and a personal recommendation from one of the UK's leading income protection specialists, simply complete this short form*.
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I have vetted the service provided by this income protection specialist* which I would recommend. Not only are they experts in their field but they will only recommend what is right for you, even if that is for you to not to take out an income protection policy at all.
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