What is TPD insurance?

Total and Permanent Disability Insurance (TPD) provides a lump sum payment if you are totally and permanently disabled.  TPD insurance will cover you if you are unable to work again in "any occupation", or your "own occupation" (your usual occupation or chosen field of employment), depending on your cover.

TPD insurance can be used to help fund rehabilitation costs, repay debts and cover living expenses for you and your dependants.

Payments are not usually made until the disability has been evident for six months, and the insurer deems that you are unlikely to work again based on the definition in your particular policy.

Buying TPD Insurance?

TPD insurance can be bought as an add-on to life insurance ("linked cover"), or as a standalone product.

Linked Cover

Linked cover is where one policy is connected to another.  While premiums for linked cover are usually lower, if you receive a payout under one of the policies, the sum insured for the linked policies are reduced by the payout amount. 

Some insurers also have a 'buyback' option that allows you to reinstate your full level of cover within a certain time after a TPD payout (usually 14 days) without the need for medical underwriting (ie. you do not need to go through the health risk assessment (underwriting) again.  This means the sum insured under your linked policies (eg. life insurance) will not change.

Cornerstone Insurance can work with you to determine whether a linked or standalone TPD policy suits your personal circumstances. 

How much cover?

TPD insurance cover is more complicated to calculate than term life insurance because you are still alive so you are still incurring living costs, which could be quite expensive given your health may have substantially deteriorated.

TPD insurance cover should include:

  • A repayment or reduction of your debts (credit cards, personal loans, home loans, investment loans etc)
  • Assistance with medical costs, extra care and day-to-day expenses
  • Provide a replacement income stream to supplement any income protection insurance payments (Income protection insurance will only ever be 75% of your pre tax wage)
  • Education expenses for your children so they may finish secondary school/university
  • An amount to enable you to take time off work to recover, or allow your spouse to take time off to assist you in your recovery.

The amount of TPD insurance cover required is reduced by:

  • The envisaged earning capacity of your remaining spouse (please remember one’s ability to earn income might be dramatically reduced with an increased family workload).  To enable the remaining spouse to maintain earning capacity, help can be hired.
  • Existing savings, including Superannuation and/or investment income.

If you successfully claim on your TPD policy, it may entirely reduce, or even void any linked policies (such as life insurance).  Importantly, after a payout you may become uninsurable and no longer able to apply for Life insurance , Trauma Insurance or income protection cover from any insurer.  Therefore, it is important to have sufficient cover to enable you to live out your remaining life on the proceeds of the claim. 

Own versus Any Occupation

The precise terms of your insurance cover is a vital consideration, particularly in relation to when you will receive a payout.

The terms of the policy will specify when you are entitled to a payout.  This will usually be where you are disabled to such an extent that you are unlikely to ever engage in:

  • your own occupation
  • any occupation
  • home duties (specifically for stay at home parents - see also "Homemaker Insurance") 

Although the definitions of these terms vary between insurers, they can be generically described as follows: 

  • ANY Occupation: You will be paid if, by reason of accident or injury or illness, you are unable to work ever again in any occupation for which you are reasonably suited by education, training or experience. 
  • OWN Occupation: You will be paid if, by reason of accident or injury or illness, you are unable to work ever again in your normal occupation. 

While "Own Occupation" premiums are more expensive, this cover may be preferable because of the broader coverage.  For example: If a surgeon suffered an injury, such as a loss of a hand, he or she would likely receive a payout under "Own occupation" policy; however the surgeon would not receive a payout under an "Any Occupation" because he or she would still be able to perform the duties of a GP.

Importantly, "Own occupation" policies may not be available for all occupations.

Whether an "Own Occupation" or "Any Occupation" policy is right for you will depend on your occupation and personal circumstances. 

Moreover, some insurers offer 'home duties' and 'modified' definitions of TPD, which may be ideal for your circumstances.

Tax Considerations

TPD premiums are not tax deductible outside superannuation.  However, TPD benefits are tax free if they are paid to the injured person or their dependants.

Inside superannuation, the reverse generally applies.  Premiums are tax deductible for the super fund, but the payout you receive is taxed.  However, there are exceptions and estate planning strategies that can be used to reduce the tax paid on the benefit. 

Generally, "Any occupation" TPD premiums should be paid inside the Super environment; however, it is paramount that you ensure your super fund allows the benefit to be paid you.

TPD benefits can be paid out as a lump sum and/or as a pension. 

There can be benefits of establishing TPD policies via an Insurance-Only superannuation funds.  Each has different different tax implications.  The right option depends on your personal circumstances.  To ensure you get the most out of your insurance cover, it is important to receive expert advice that considers all aspects of your personal and financial situation.

For impartial, individualised and quality advice on how Total and Permanent Disability insurance can protect your financial security if you are unable to work due to disablement, contact Cornerstone Insurance.