Total and Permanent Disablement (TPD) insurance protects you and your family by paying a lump sum if you suffer an injury or illness that leaves you totally and permanently disabled and unable to ever work again.
It is important to work out individually what you need to protect and how much cover you need. The lump sum payment can be used for goals such as:
Without insurance, you, your family or dependants may need to run down your savings, sell assets, and/or rely on family or Centrelink for assistance. You may find it difficult to maintain your standard of living or pay for the care and medical assistance you need, placing unnecessary extra stress on you.
To receive a TPD payment, you must meet the definition in the insurance policy you select. Some policies require that you are unable to work in any occupation for which you are ‘reasonably suited by training, education or experience’ while other policies may provide cover if you are permanently unable to work in your own occupation.
Generally you need to be working but you may also obtain policies that cover other modified definitions. These might trigger payment if you lose limbs or your sight or are unable to undertake activities of daily living unassisted. This may provide cover for homemakers or others who are not working.
TPD cover under an ‘any’ occupation definition is less expensive than cover under an ‘own’ occupation policy but it could be more difficult to meet the requirements for a successful payment because the insurer may take into account other training and experience you may have when determining the extent of your disability.
The ‘any’ occupation definition may be suitable for you if you want to own the cover within your super fund or you want the less expensive option.
The ‘own’ occupation option may be suitable for you if you have the cashflow to afford the higher premium and want the stronger disability definition.
You can buy TPD insurance as a stand-alone policy that includes just Total Permanent Disablement cover and no death cover.
You can also purchase your cover so that it is ‘linked’ to your Term Life or Trauma Insurance. With ‘linked’ covers, if you make a TPD (or Trauma) claim and the claim is paid, the other cover may be reduced by this amount. Linking your covers in this way can reduce the cost of your insurance. Policies may offer ‘buy-back’ options to be purchased to regain the reduced cover amount after a period of time has elapsed.
Owning your TPD insurance in your own name means you pay the premium from your cashflow. The premiums for self-owned TPD insurance are not tax deductible. In the event of a successful claim, the proceeds will be paid to you as a tax-free lump sum.
This may be suitable if you have the cashflow available to pay the premium, you want the ‘own’ occupation TPD definition, or you want to ensure the proceeds will be a tax-free lump sum.
Alternatively you can apply for cover within your superannuation fund. This allows the premium to be paid by making contributions to super or simply be deducted from your superannuation account balance so it does not affect your cashflow. The premium is a deductible expense to your superannuation fund and can reduce the tax payable on contributions and investment income.
In the event of your total and permanent disablement, and upon a successful claim, the insurance proceeds may be paid into your superannuation fund and form part of your account balance. You will need to meet a superannuation condition of release (such as permanent incapacity) to access the proceeds. This may restrict access to your benefits compared to a self-owned policy. If you are under age 60 tax may be payable on amounts you take out of superannuation.
This may be suitable for you if you do not have the cashflow to make the premium payments, receive contributions from an employer into superannuation or are eligible to make salary sacrifice contributions, are eligible for co-contributions, or are self-employed. Tax concessions can reduce the cost of insurance. If additional contributions are made into superannuation to cover premiums it is important to ensure you do not exceed the limits on how much can be contributed.
Where your sum insured is large, not all of the benefit may be able to be taken as a tax-effective income stream by your beneficiaries.
Flexi-linking or super-linking allows policies to be split across the superannuation and non-superannuation environments. This may allow for greater price transparency and choice. When insurance is held in a flexi-linked or super-linked policy, clients may prefer to have different premium frequencies.
Under a ‘Super-Linked’ TPD structure, you have two TPD policies in place — one owned through superannuation (with an ‘Any’ Occupation definition) and another owned personally (with an ‘Own’ occupation definition). In the event of a TPD claim, you are first assessed under the ‘Any’ occupation super owned policy. If you meet this definition the benefit is paid out via superannuation.
If you do not meet this definition, you are then assessed under the ‘Own’ occupation definition under your personally owned policy and paid out under this policy. It’s important to note that you are only covered once under both these policies. If a claim is payable under one policy, the other policy will cease.
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