Life Insurances

What is TPD Insurance? Why Do I Need It?

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Most of us hold TPD insurance in our super funds, but what exactly is TPD and do I really need it?

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What is TPD Insurance?

TPD is an insurance acronym for Totally and Permanently Disabled.

Therefore TPD insurance is a type of life insurance that insures against a sickness or injury which results in a person being unable to work in their own or any occupation ever again.

If the insurance company is satisfied that a TPD claim exists, then the lump sum payment is made to the insured.

EXAMPLE: TPD Insurance Listed on a Super Statement

TPD Insurance - Example

TPD Insurance Definitions

Like any insurance policy there are terms and conditions.

When it comes to TPD insurance there are different levels of cover.

There are three main types and definitions of TPD Insurance:

  • Own Occupation TPD – the claimant must be unable to work in their own occupation ever again.
  • Any Occupation TPD – the claimant must be unable to work in their occupation and also any occupation that they are suited to via education, training or experience ever again.
  • Non-Occupational TPD – the claimant must be unable to conduct 2 of 5 activities of daily living.

Wikipedia

Own occupation TPD has a higher premium cost because it has the most specific definition and is easier to satisfy than non-occupational TPD. Following this any occupation TPD has a higher premium cost than non-occupational TPD.

TPD insurance is designed to assist with the future cost of living in the event you can no longer work, as well as help fund the costs of rehabilitation and care.

How large an insurance payout would you need to maintain a good standard of living if you could no longer work again?

Why Have TPD Insurance?

TPD insurance provides a lump sum payment if you can no longer work due to sickness or injury.

By definition a TPD event is serious, hence you will require financial assistance to pay for medical bills and the future costs of living, particularly when you can no longer work.

Some TPD Facts:

  • 2.6 million Australians aged under 65 are million living with a physical disability.
  • 60,000 (estimated) Australians suffer strokes per year or roughly one stroke every 10 minutes.
  • 88% of stroke survivors live at home and most have a disability.
  • 1 million (or more) Australians need 1 million assistance with core activities (such as communication, transport and self-care) due to severe disability.

Without TPD insurance you will have to rely on family, friends and the health system for the remainder of your life.

A Closer Look: TPD Claim Statistics

To get an idea of what TPD insurance covers, it is useful to look at some actual claim statistics from the insurer TAL:

CHART: TPD Claims by Type in 2014

tal-tpd-insurance-claims-2014

* 2014 TAL claims statistics

As you can see the vast majority of claims were cancer related 

Considering the definition of TPD and the claim statistics listed above, it would appear that the cancer payouts are for terminal conditions, where the chance of recovery is remote.

Cancer is so common and the survival rate is improving such that income protection and TPD insurance payouts are not usually triggered.

If you want to insure against cancer you need trauma insurance.

What is Trauma Insurance? Do I Need It?

What is trauma insurance (critical illness insurance), why does it exist, do I need it and if so how do ...
Read More

Real Life Claims:

Here is a selection of TPD claims Zurich insurance paid out in 2015 according to the age and condition of the claimant:

TPD Insurance - Examples

As you can see the TPD claims were of sufficient seriousness to suggest that the client may only have a limited life remaining.

Considerations when Applying for TPD Cover

1Premium Type:

When it comes to the TPD insurance premium there are two options:

  1. Stepped premium – one that will rise every year, with your age and risk level.
  2. Level premium – one that will remain constant.

Here is the catch; under a level premium you will generally pay a higher premium for the first few years, when compared to the same policy on a stepped premium.

Stepped vs Level

2Expiry Age

As long as you continue paying the annual premium, a TPD insurance policy can last until you are 65 years of age.

3Who Can Own the Cover?

You can hold both own occupation and any occupation TPD in your personal name.

Any occupation TPD is often held through superannuation, because a successful claim will satisfy the conditions of release (i.e. you can draw money from your super fund if you are considered TPD).

Own occupation TPD cannot be held through a super fund due to restrictions in accessing potential payouts.

4Tax Deductibility

According to the ATO website, you cannot claim a personal tax deduction for other life insurance policies such as life (death cover), trauma (critical illness) or TPD (total and permanent disability).

income-protection-ato-no-deduction

On the other hand premiums paid on any occupation TPD held in super are tax deductible to the super fund, but this means TPD payouts are subject to taxation through super.

TPD payouts are a relatively complex area of taxation so it is recommended you seek professional advice in the event of a successful TPD claim in super.

Summary

  • Most people hold TPD insurance in their super funds.
  • TPD insurance pays a one-off lump sum if you suffer a sickness or injury which renders you unable to work again.
  • TPD insurance provides a lump sum to help fund your future expenses.

Not all insurance policies are the same. Make sure you read the documentation before you sign on the dotted line.

 

The Wealth Guy Signature

 

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The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you with this.

 

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