TPD insurance

What every Australian needs to know about TPD insurance..

TPD insurance

Many working Australians have TPD insurance either through their employer or through their super fund. Unfortunately, for many people, this means they are under insured, paying too much for their insurance, or they have the wrong type of insurance to cover their needs. We answer your questions and help you compare covers so that you can take control of your TPD insurance.

What is TPD insurance, and how does it work?

Total and permanent disability insurance, as the name suggests, pays out a benefit if you become permanently disabled. This could be as a result of an injury, such as losing the use of your legs in a car accident, or caused by illness, such as losing the use of your legs due to diabetes.

The benefit is usually paid out as a lump sum, and there are no restrictions on how you can use the money. You may choose to spend it on living expenses, like food and bills, or to pay off medical expenses. TPD is particularly useful if you need to make modifications to your home, like installing a ramp for wheelchair access, or if you need to pay for a carer.

Your premiums will be based on your personal circumstances. The insurer will usually ask for the following information when you apply for a policy:

  • Age – The older you are, the more expensive your premiums are likely to be.
  • Profession – If you work in a high-risk profession, you’ll probably have to pay higher premiums.
  • Medical History – The insurer may choose to exclude some of your pre-existing conditions from the policy, or they may charge you an extra premium to cover them.
  • Family medical history – If you have a family history of certain diseases, you are riskier to insure, and the policy will likely cost you more.
  • Lifestyle – This includes factors such as whether you smoke or participate in high-risk sports like skydiving. Because these increase your chances of getting ill or injured, the insurer will charge you a higher premium.

What does TPD insurance cover?

Each insurer defines disability differently, so it’s important to read your policy document carefully. However, most policies fall under a few broad categories:

  • Any occupation – Applies if your disability prevents you from doing any type of work. For example, a surgeon who suffered a severe brain injury that prevented them from performing surgery or doing any type of work, admin or otherwise, could claim TPD under this classification.
  • Own occupation – Applies if you can’t fulfil the usual duties of your role. For example, a surgeon who suffers permanent damage to their hands and can no longer perform surgery as a result would be eligible for this type of benefit payment. They may still be able to perform other jobs without the same requirements, but that won’t prevent them from claiming TPD under this definition.
  • Loss of limbs or sight – If you lose the use of your limbs or eyes, this type of benefit will cover you, regardless of what tasks you can perform. For example, if you lose the use of your legs, you may still be able to work and perform many domestic tasks yourself, but under this classification, you would be able to claim TPD anyway.
  • Activities of daily living – Applies if your disability prevents you from performing basic tasks like showering, dressing, walking, etc. Your occupation is irrelevant under this classification.
  • Home duties – This classification usually only applies to homemakers. It provides a benefit if their disability prevents them from completing their usual domestic tasks like cleaning, cooking, taking care of children, etc.
  • TPD upon retirement – Most insurance policies automatically convert to this on your 65th or 70th Because you’re of retirement age, work stops being a factor. Benefits are paid out if your disability stops you from performing basic tasks (similar to the ‘daily living activities’ definition) or if your type of disability is listed on the policy (similar to the ‘loss of limbs’ definition).

Some insurers offer partial benefit payments if you are partially disabled, according to their policy definition. For example, if your policy defines disability as losing vision in both eyes, you may be eligible for a partial benefit if you lose sight in one eye.

It’s important to note that intentional self-inflicted injury is automatically excluded in most policies.

Why do I need TPD insurance?

If you become disabled, you’ll need think about how you will cover your expenses. Do you have enough savings and assets to be comfortable if you can never work again? Will you have enough money to pay for medical bills, long-term therapy, and modifications to your home? Do you have a support network of friends and family who can help with your care, or enough money to pay for professional carers? If your answer to any of these questions is no, then you may need TPD insurance.

Here are just some of the ways TPD insurance can help you:

  • Living expenses – If you can’t work anymore, or you can only work in a reduced capacity, you may need to rely on your TPD benefit to pay for your daily expenses.
  • Debts – Do you have a mortgage, car loan, or credit card debts that you need to pay off with your TPD benefit?
  • Medical and rehab expenses – Though Medicare covers most medical costs, it doesn’t cover everything, and you may need to draw on your TPD benefit to cover the gap.
  • Modifications to home/vehicle – You may need to modify your home to suit your disability, for example, you may need to install ramps for wheelchair access.
  • Professional assistance – You may need carers or cleaners to help you manage daily tasks that you can’t do yourself anymore.
  • Future expenses – This could involve planning for retirement, supporting your dependents and providing for their future education expenses.

How do I compare TPD insurance policies?

When comparing TPD policies, many people look at how much the premiums cost. However, it’s also important to look at what the policy covers to ensure you’re getting the best value for your money.

We discuss some of the main features of TPD policies and how they affect premium costs, to help you decide which policy offers the best value for your needs.

Own vs Any occupation

Any-occupation policies are usually much harder to claim than own occupation. Only very severe disabilities would leave you unfit for any type of work at all. For that reason, any-occupation policies tend to be much cheaper than own-occupation policies.

Premium type

The older you are, the more expensive your insurance will be. For this reason, TPD premiums can change over time. These are the three main types of premiums available:

  • Stepped premiums – The cover stays consistent, but the premiums increase with age.
  • Premium freeze – The premium remains the same, but as you age, your cover decreases.
  • Level premiums – Don’t change with age. They start out more expensive than stepped premiums and stay at a consistent level over time.

Benefit amount

The higher your benefit amount is, the higher your premium is likely to be. If you have additional features, such as a benefit that is indexed to inflation, it can cost you extra.

Packaging insurance

You have the option to buy a stand-alone TPD policy or package it together with other types of insurance, such as life insurance. Packaging your insurance can work out cheaper, but it’s important to note that your policies could be linked. That means, if you claim your TPD benefit, your life insurance cover may decrease by the amount you were paid.

Waiting periods

Some disabilities are obviously permanent, while others may improve over time and with medical care. For this reason, some benefits are paid out straight away, while others may be subject to waiting periods that allow the insurer to assess your disability over time and see how it stabilises.

TPD policies with longer waiting periods are usually cheaper, but you will need to financially support yourself until the benefit is approved.

How is TPD insurance taxed?

TPD insurance is subject to different tax laws within super than it is outside of super. Here are the main differences:

Premiums

TPD premiums outside of super are not tax-deductible.

Within super, there may be deductions available depending on the type of fund and type of insurance you have. Your fund will organise these directly with the ATO on your behalf.

Benefit payments

If you have TPD insurance outside of super, and you receive a benefit, you will not need to pay any income tax on the money you receive, provided you are both the policyholder and the life insured.

If your insurance is through your super and you’re eligible for a benefit, the insurance company will pay it directly into your super fund. When you withdraw it from your super, it will be subject to super taxes.

How does TPD insurance compare to other types of insurance?

Though you may have other types of insurance, you might still need TPD.

The pros and cons of having TPD insurance through your super

Almost all APRA-regulated superannuation funds in Australia offer TPD insurance. If your employer sets up a super account for you, the super fund is legally required to give you TPD insurance as a default unless you opt out. If you set up the super account yourself, you are usually offered TPD upon joining.

It’s important to note that TPD insurance through your super is very different to TPD outside of super. Below, we’ve listed some of the main pros and cons of having insurance in your super to help you decide if it’s the best option for your circumstances:

PROS

Default insurance without health checks

If you get default insurance through your super, you don’t need to answer questions about your health and lifestyle, making the process far more convenient than buying insurance yourself.

Cheaper premiums

Because the super fund is insuring a lot of people under a group policy, they can often negotiate cheaper premiums with the insurer than you would get as an individual.

Premiums paid through super

When you have TPD insurance through your super fund, the premiums are deducted from your super balance. This can be a good option for people who may not be able to afford TPD outside of super.

Payout options

When you claim a benefit through your super, the insurer pays the money to your super fund. You can then choose to withdraw it as a lump sum or in smaller chunks over time. Outside super, some insurers do offer to pay your TPD as an income rather than a lump sum, but you don’t receive investment returns on the money as you would otherwise.

CONS

Age limits

TPD insurance in super usually ends at age 65 or 70. If you want TPD insurance past this age, you’ll need to find an external insurer.

Insufficient default cover

When super funds give you default TPD insurance, you are covered for a set amount which is usually determined by your age. If you want more insurance, then you’ll need to apply and complete medical checks.

Reduced retirement savings

By paying for your TPD insurance through super, you are effectively decreasing your retirement nest egg.

Cancellation policies

When your TPD insurance is linked to your super, it can be cancelled according to the fund rules. Many funds cancel your insurance automatically if your super balance falls below a certain amount or if you stop receiving employer contributions. In these cases, if you want to reinstate your TPD cover, you’ll need to apply and complete all the health checks again.

Inflexible

Because superfunds have group policies that cover all their members, there’s not much room for flexibility or individualising policies. Policies outside of super offer many more features such as indexing benefits to increase in line with inflation or giving you the option to insure two lives on the same policy.

 

Any Occupation Only

A majority of super funds only offer any-occupation TPD insurance. If you want own-occupation insurance, you’ll need to find it outside of super.

Where can I get TPD insurance?

You can sign up for a TPD policy through your super fund, financial advisor, or directly from the insurer. Savvy’s comparison tool is a great place to start. We can help you weigh up your options and find a great deal.

What is a TPD insurance buy-back option?

If you have a death and TPD policy that is linked, when you claim the TPD insurance, your death cover will reduce by the benefit amount. A buy-back option allows you to reinstate your original death cover. Usually, you need to wait 12 months before the buy-back option is available.

What is a TPD insurance life-event increase?

Certain life events can change your insurance needs. For example, if you get married or have a child, you may need more insurance to ensure you and your family will have enough money if you can’t work anymore.

Many insurers allow you to increase your insurance in these circumstances without all the usual health checks. Your insurer may set a time limit on how quickly you have to apply for the extra cover (e.g., within 60 days of the life event occurring), and they may limit how many life-event increases you can have per year.

What are loading and exclusions on TPD insurance policies?

Exclusions are the things the insurer won’t cover, for example, pre-existing illnesses or injuries that result from high-risk sports.

In some cases, rather than exclude certain illnesses or injuries, the insurer will offer to cover them but will charge you an extra amount, known as a loading. For example, the insurer may generally not cover accidents that happen while skydiving but will allow you to purchase this as an optional extra by paying a loading.

What happens if I have twoTPD policies?

This happens more commonly than you might think. If you have more than one super account, you may have more than one TPD policy. Or you may not realise you have TPD insurance through super, and you might go and buy a new policy directly from an insurer.

The good news is that if you do need to make a claim, you can receive benefits from all your TPD policies, though the insurers may have some restrictions around this.

The downside is that you’ll probably be paying for more insurance than you need. You could consider cancelling any policies you don’t need, or you may choose to transfer your insurances to one provider so that your cover amount stays the same.

How do I claim TPD insurance?

To make a claim on your TPD insurance, you’ll need to provide details about your job, such as how many hours you work, the tasks you’re required to perform and your income. You also need to provide evidence from a doctor of your disability. The insurer may request to speak to your doctor directly, or they may ask an independent specialist to assess you. You’ll likely know if you have been approved within 6 months.