Insurance cover for a permanent illness or injury.

A permanent injury or illness can make it difficult or impossible to return to work. TPD insurance can provide a financial safety net to help support you and your family, and pay for medical and rehabilitation costs.

What TPD insurance covers

TPD insurance pays a lump sum if you become totally and permanently disabled because of illness or injury.

Each insurer has a different definition of what it means to be totally and permanently disabled. It can cover you for either:

• Your own occupation — you’re unable to work again in the job you were working in before your disability. This cover is more expensive and is usually only available outside super.
• Any occupation — you’re unable to ever work again in any job suited to your education, training, or experience. This cover is cheaper but has a higher threshold to claim, so it’s less likely to pay out.

Linked Cover

TPD insurance is available as a ‘linked’ benefit on Life Insurance or Trauma Insurance, or as a stand-alone policy.

‘Linked’ cover is where one policy is connected to another. In the event of a payout of a linked policy, the sum insured in the other policy would be reduced by the payout amount.  Some insurance policies allow the right to buy back any reduction of sums insured. The prime advantage of ‘linked’ cover is that premiums are cheaper.

Is TPD insurance tax deductible?

TPD insurance can be deductible in Superannuation.  Generally, ‘Any Occupation’ TPD premiums should be paid inside the Superannuation environment.

Before TPD insurance is taken out in Superannuation, it is paramount to ensure that if there were a payout, the recipient would be allowed access to these funds.  A disability Superannuation benefit is a benefit:

• That is paid to a person because he or she suffers from ill-health (whether physical or mental); and
• Where two legally qualified medical practitioners have certified that because of ill-health, it is unlikely that the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience, or training.

A disability Superannuation benefit may be paid as either an income stream benefit and/or a lump sum benefit.

However, clients who have reached their preservation age that do not meet the permanent incapacity release condition can access benefits under the following conditions:

• Retirement (lump sum or pension from age 55);
• Age 65 (lump sum or pension);
• Transition to retirement (can commence at age 55 as a pension with a maximum 10% annual drawdown until retirement or age 65).

Further, if your Superannuation fund receives a TPD payout it is not taxable.

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.

Superannuation disability benefits tax considerations

Superannuation disability benefits can be taken as a lump sum and/or a pension.  The right option or combination of options depends on your personal circumstances.

Considerations include:

• Tax
• Life expectancy
• The availability of the future service period deduction (only claimed by Self Managed Superannuation Funds)