What is TPD insurance and what are the different definitions?

Did you know that if you suffered a serious injury or illness such that you could never return to work, that the financial impact to you and your family can be worse than if you died? If you think about it, in both scenarios you would not be able to earn an income and in the first scenario you would still need living expenses and most likely medical expenses for yourself on top of your family’s living expenses. Additionally, if you are single with no dependents, you would most likely still need TPD insurance, even though you might not need life insurance. TPD insurance or total and permanent disability insurance is designed to pay a lump sum benefit to you if you become totally and permanently disabled due to an accident or sickness and you are unable to ever work again. The lump sum benefit could be used to pay your medical expenses, modifications to your home or your living expenses.

Here is the breakdown of TPD insurance:

1.      TPD insurance definitions (working)

There are two definitions for TPD insurance that are related to you not being able to ever work again due to total and permanent disability. There are also non-working definitions for TPD insurance. The “own occupation” definition relates to you not being able to ever work again in your current occupation. The “own occupation” definition is the superior definition as you would qualify for this definition if you qualified for any of the other definitions. The “any occupation” definition relates to you not being able to ever work again in any occupation for which you are reasonably qualified by education, training or experience. For example, if a surgeon’s hand is damaged beyond repair, the surgeon would likely qualify for the “own occupation” definition if it is unlikely that the surgeon could ever perform surgery again. In this scenario the surgeon would have medical education and training and would most likely be able to work in other areas of medicine, therefore, it would be unlikely that the surgeon would qualify under the “any occupation” definition. As the “own occupation” definition is the superior definition, the risk to the insurer is higher, which means that the premiums are also higher than for the “any occupation” definition.

2.      TPD insurance definitions (non-working)

The non-working definitions are designed to provide cover for people who are not currently working and for people who don’t qualify for the working definitions e.g. many casual workers. The main non-working definition is the “activities of daily living” or ADL definition. The ADL definition is based on you not being able to perform a certain number of activities of daily living such as feeding yourself, dressing yourself, bathing yourself, toileting yourself and transferring yourself (e.g. getting out of bed or a chair). Some insurers also have a “home duties” definition, which is based on you not being able to duties around the home such as cleaning and cooking.

The non-working definitions are designed to provide cover for people who are not currently working and for people who don’t qualify for the working definitions e.g. many casual workers. The main non-working definition is the “activities of daily living” or ADL definition. The ADL definition is based on you not being able to perform a certain number of activities of daily living such as feeding yourself, dressing yourself, bathing yourself, toileting yourself and transferring yourself (e.g. getting out of bed or a chair). Some insurers also have a “home duties” definition, which is based on you not being able to duties around the home such as cleaning and cooking.

3.      Underwriting and guaranteed renewability

If you purchase TPD insurance through an adviser your policy will be fully underwritten and guaranteed renewable. Fully underwritten means to take out a policy you need to provide information including your income, your medical history, your occupation, and your pastimes. The underwriting assessment at time of application rather than at time of claim increases the chance of claims being paid. Guaranteed renewable means that your policy cannot be cancelled, and premiums cannot be increased due to any change in your health, occupation, or pastimes. Additionally, if your health, occupation, or pastimes change, no exclusions can be added to your policy. If you purchase TPD insurance through your Super fund your policy may not be fully underwritten and won’t be guaranteed renewable.

4.      Paying premiums from Super or outside Super

You have the option of either paying your premiums from your Super fund or directly (e.g. bank account or credit card). There are pros and cons for each payment method, and you will need to consider your personal circumstances and preferences to decide on a payment method. Paying your premiums from Super increases your cash flow but decreases your Super balance and the amount you will receive at your retirement. It should be noted that the “own occupation” definition does not meet the conditions of release criteria for Super, which means a policy with the “own occupation” definition can’t be paid from your Super fund. However, you can set up parallel policies for the price of one policy where you have a policy in your Super with the “any occupation” definition and a policy outside Super with the “own definition.” This set up allows for an assessment under the “any definition” first and if not met the “own occupation” definition with two thirds of the premium paid from your Super fund and one third of the premium directly (e.g. bank account or credit card). 

5.      What happens with a TPD insurance claim?

Most policies require that you have not been able to work due to an injury or illness for at least 3 or 6 months before a claim could be considered. Due to the seriousness and permanency of an injury or illness required to satisfy the definitions for TPD insurance claims the process is usually quite involved and can take some time. Usually quite a lot of medical evidence needs to be submitted and there is generally a requirement that two doctors certify the claim under the definition of the policy. At claim time, it is definitely to your advantage to have an adviser, who will be your advocate and help you through the process.