Travel Insurance Tax Tips 1*

It is not widely known that travel insurance is tax deductible. And although the individual allowance is quite small, some interesting strategies are emerging for taking full tax advantage.

Ten years ago, when travel insurance was relatively inexpensive, the tax treatment of travel insurance premium was not a consideration in financial planning.

Now, with premiums for long range plans measured in thousands, not hundreds of dollars tax treatment should form part of your buying decision.

In most respects, travel health insurance and domestic health and dental insurance are treated similarly by Revenue Canada. Which is to say it constitutes a 'pre-paid medical expense'

The key differences are in the area of non-medical benefits provided by travel insurers such as trip cancellation or baggage insurance.

Additionally, these non medical benefits may trigger provincial sales taxes.

As a result many insurers separate these benefits (and premiums) to simplify tax reporting. As a Snowbird, it makes sense to do the same i.e. purchase travel health insurance separately from trip cancellation coverage.

(Most industry experts agree that 'stand alone' baggage insurance is NOT a good investment)

The simplest tax benefit is available to all individual Canadian taxpayers.

If  medical expenses for the year exceed a base threshold amount, then the expenses are deductible at the lowest marginal tax rate 17%.

For the purposes of illustration and to keep the math simple, we use 17%. In fact it's very slightly less than that because the threshold has to be satisfied before the deductions kick in.

This means that the after tax cost of $1000 of insurance premium is $ 830. It's not a huge amount of money to save, but it offsets the cost of having a tax professional prepare your returns.

One other thing that tax impacts is how to evaluate the cost of coverage, and acceptable risk when considering deductibles.

An example:

5 months coverage $0 deductible = $1000 (net $830)

5 months coverage $500 deductible = $800 (net $664)

Net Savings = $166

In the event of a claim, the deductible would generate medical expenses. In other words the $500 nets out after tax to $415.

So the evaluation is: Is it worth it to me to have a guaranteed savings of $166 vs. the possibility of being out of pocket $415 ?

Everyone has different risk tolerances, so that's answered on an individual basis and in our example the deductible is quite small so the tax impact is small. But for large deductibles the after tax cost can't be ignored.

Travel Insurance Tax Tips #2

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*The need for professional advice

This article was written based on the best available information, and provided for general information purposes only. It is no substitute for professional advice.

You should consult a financial planner, a tax specialist, or a group benefits expert before deciding on your personal tax/travel insurance strategy.