The rundown on total and permanent disability insurance
A permanent injury or illness can make it difficult or impossible to return to work. So, what do you do if you can’t return to work and earn an income? This is where total and permanent disability insurance (TPD) comes in. TPD insurance can provide you and your family with a financial safety net if you’re unable to work.
In the case that you become totally and permanently disabled and cannot return to work, TPD insurance will pay a lump sum amount. This lump sum amount will act as a substitute for future income. It can go towards medical bills and rehabilitation costs, as well as your regular debts and expenses.
In 2017, it was reported that approximately 81% of the Australian population have TPD cover. Though this is slightly less than the percentage of people that have life cover, it makes TPD insurance one of the most popular forms of life insurance in Australia.
Features of TPD insurance
Definitions of ‘total’ and ‘permanent’
The definition of ‘total and permanent’ in relation to the disability suffered will vary between insurers.
To claim, you must reach the particular threshold within your policy. This means that you must satisfy the insurer’s definition of total and permanent disability in order to make a successful claim. Milder conditions or disabilities that do not prevent you from working are often not considered for claims. For example, losing a finger or suffering a mild stroke may not be enough to reach the threshold. However, some policies may allow for a limited payout in cases of partial disability. For example, they may payout 25% of the maximum benefit.
Furthermore, disabilities that arise from pre-existing medical conditions may be excluded in your policy. However, some insurers may allow you to increase your premium with a ‘loading’ so that the insurance can cover such disabilities arising out of any pre-existing conditions. Insurers will often assess the extent to which your pre-existing condition affects you by conducting some medical examinations. Be open and honest with your insurer, as you don’t want this to negatively impact you later on when you need the benefit most.
Own occupation vs any occupation
TPD insurance is not a one size fits all option. Most insurers will offer varying amounts of cover, though the most common types of cover include:
- Your own occupation;
- Any occupation; or
TPD insurance for your own occupation will cover you when you are unable to return to work in an occupation that you were working in before your disability prevented you from doing so. This level of cover is typically the most expensive, as the threshold is lower. Cover for your own occupation is unlikely to be available through your superannuation.
In comparison, TPD insurance for any occupation will cover you when you are unable to work in any occupation suited to your education, training or experience. This is usually cheaper than cover for your own occupation. However, the threshold that must be reached before benefit can be paid is much higher. Many superannuation funds offer this type of TPD insurance.
Lastly, the third, and least common, type of TPD insurance is non-occupational cover. To claim under this form of insurance, you must not be able to conduct a certain number of daily activities. In addition, the threshold for a claim is high, and some insurers may not offer non-occupational insurance at all. Superannuation funds will likely not offer non-occupation TPD insurance.
As with other forms of life insurance, TPD insurance usually has different premium options. These options are ‘stepped’ premiums and ‘level’ premiums. ‘Stepped’ premiums are recalculated on a yearly basis, and thus increase each year as you get older. Though they may be the cheapest premium option at the beginning, they will increase over time. On the other hand, ‘level’ premiums are not affected by your age, until you reach 65 or 70 (i.e. retirement age). The premium will thus remain constant, and only increase by small amounts to account for inflation or changes to insurer fees. Due to this, level premiums will cost more at the outset.
So, stepped premiums are cheaper in the earlier years whilst level premiums are more affordable in the later years. Consider your current age, and for how long you want to have TPD insurance. This will help you make a decision about which premium choice is the right one for you.
Life cover is the most popular form of life insurance, with 94% of working Australians taking out some form of this life insurance. Generally, most people consider taking out TPD insurance as an addition to life cover. Many insurers will tailor a bundle of life insurance for you, so you don’t have to purchase many individual policies. Some may even offer discounts for insurance bundles.
In addition to life cover, you may consider bundling TPD insurance with other forms of life insurance. Some other types of life insurance include trauma insurance and income protection insurance. Trauma insurance pays a lump sum if you suffer a traumatic and critical injury. On the other hand, income protection insurance pays a monthly benefit if you are unable to work and earn an income. Check out our comprehensive guide on the many types of life insurance to see what suits your needs. Then, you can speak to your insurer or financial advisor to see what they can offer you.
Why should I consider TPD insurance?
As with most forms of life insurance, TPD insurance provides critical financial assistance in the case of severe injury or illness. This can be all the difference in being able to live a comfortable life with your disability. Some of the things you could use your lump-sum payment for include:
- Medical treatments;
- Pharmaceutical costs;
- Rehabilitation expenses;
- Ongoing physical or mental therapy;
- Care and support; and
- Renovations and modifications to your home or car (e.g. wheelchair access, shower support poles, etc).
However, keep in mind that there are many other costs associated with a disability aren’t medical in nature. Remember that you are unable to work and therefore unable to earn an income and accumulate super. Consider using your payout for other things, such as:
- Repaying debts such as home mortgages and credit card debts;
- Meeting your weekly living expenses such as groceries; and
- Saving money for your retirement.
Also, remember that though you may have lost your income, there are other ways to financially get you through. For example, private health insurance may be able to help pay for medical costs. You may have some superannuation saved up for retirement already, or have other savings that will help cover costs.
How much TPD cover should I get?
The appropriate amount of TPD cover you choose to get is entirely up to you. Consider your current income, your current financial situation, your outgoing expenses, as well as your future medical needs and the needs of your family. Your own circumstances will inform your decision. However, it is always wise to speak to your insurer or financial advisor to get their opinions and recommendations.
A TPD insurance payout will provide you with your main source of cash income. Therefore, consider how much money you will reasonably need to live a comfortable life.
Common exclusions to consider
Most life insurance policies will provide some circumstances under which benefit will be excluded. It is wise to double-check your policy to ensure that the cover provided is adequate for your needs.
Most TPD policies will exclude benefit if:
- The disability is caused by a deliberate, self-inflicted injury;
- You do not survive for at least 14 days after suffering the injury; or
- The injury results from your participation in illegal, criminal or dangerous activity.
All TPD insurance policies will have different exclusions and different time frames on these exclusions. For example, a deliberate, self-inflicted injury may exclude benefit entirely, or may only exclude benefit if it is inflicted within the first 12 months of the policy. Similarly, the policy may require you to survive for 14 days after suffering the injury. In other policies, it may require you to survive the injury for a week, or a month.
Of course, the minimum and maximum amount of cover that you can take out will differ between insurers. Generally, the minimum can be around a few thousand dollars, whereas the maximum can be up to the millions. It’s best to shop around to find an insurer that will provide the right amount of cover for you.
You can certainly get TPD insurance through your superannuation fund. Superannuation law requires that the disability threshold is based on any occupation. Thus, even if you are unable to return to work in your own occupation, TPD insurance through super will not be payable if you are able to retrain in a different occupation.
Many superannuation funds will offer cover from as young as 15 years of age. Most cover will cease at 65 or 70 years. Sometimes, ‘default cover’ is automatically applied to those over the age of 25. Therefore, it’s critical that you read your superannuation policy to figure out whether you are eligible for TPD insurance. The cost of the insurance will be debited directly from your super balance, rather than your bank account.
The National Disability Insurance Scheme provides Australians under the age of 65 living with a permanent disability reasonable financial support. You must have a permanent disability to qualify for this scheme. If you make a claim under TPD insurance, this will not affect your ability to claim under NDIS. However, NDIS support may sometimes fall short of your needs, which is where TPD insurance comes into play.
If you have a permanent disability, you are eligible to receive compensation from more than one institution. Having TPD insurance will not affect your ability to claim under your state’s workers’ compensation scheme. However, note that the workers’ compensation may impact the amount of benefit you receive from your insurer. Speak to your insurer about how these institutions interact, and how it will affect you personally.
Generally, your TPD payments and claim payout will not be taxable. However, the benefit may be taxable in cases where it is paid from your superannuation.
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