Premium Offset

Premium offset is a clause in some income protection insurance policies that reduces your monthly benefit by the amount you've saved in tax by claiming premium deductions. The purpose is to prevent over-insurance and ensure you don't profit from your disability. Here's how it works: If you pay $2,000 in annual premiums and claim this as a tax deduction at a 37% marginal tax rate, you save $740 in tax. With a premium offset clause, your monthly benefit would be reduced by approximately $62 per month ($740 ÷ 12 months) to account for this tax saving. This ensures your net financial position doesn't improve from being disabled. Not all policies include premium offset clauses, and the specific calculation methods vary. Some policies offset the gross premium amount, while others offset only the tax saving. Agreed value policies typically don't include premium offset, while indemnity policies more commonly do. The offset may apply differently depending on whether you actually claimed the deduction in your tax return. Premium offset interacts with other policy features like benefit structure and indexation. When comparing policies, it's important to understand whether premium offset applies, how it's calculated, and how it affects your net benefit. For high-income earners with significant premium tax savings, premium offset can materially reduce monthly benefits.