Total and permanent disablement (TPD) is often joined with life insurance as default cover inside superannuation. It is often called disability insurance and is one of three types of cover you can get inside super, the others being life and income protection.
We will look at what TPD is, the importance of definitions, claims and industry issues, and how TPD may be suitable for your purposes.
See also our guides on life insurance and income protection insurance. or learn about the benefits and drawbacks about purchasing insurance through your super.
What is TPD insurance?
Total and permanent disablement (TPD) insurance pays a lump sum if you become permanently disabled and are unable to work again. It basically insures you against the risk that your ability to accumulate super (retirement income) is cut unexpectedly short.
Super funds offer only “Any Occupation” TPD cover rather than “Own Occupation”.
- Any Occupation pays a lump sum if you become permanently disabled and are unlikely to work again in your own occupation or any occupation to which you are suited by education, training or experience.
- Own Occupation pays a lump sum if you become permanently disabled and are unlikely to work again in your own occupation. Because the terms are quite specific and a payout is more likely, this is the most expensive form of TPD insurance.
How does TPD cover work?
Many funds offer cover up to the $3 million mark, some to $5 million, with cover available from as young as age 15 (not all funds) and ceasing at age 70. Most default cover may only be between $80,000 and $400,000. Generally, cover is automatic for those aged 25 and over, meaning the cover is applied once you join a fund and is called “default cover”. It is debited straight from your super balance, not your bank account.
Gender, age and occupation influence the cost of premiums. Risky or hazardous jobs may mean paying a higher premium. TPD cover in super becomes more expensive as you age. Default premiums range from around $3 per month to over $40 per month, but most premiums tend to hover between the $15 to $30 per month mark.
You do not need to provide medical and health information to receive default cover, however, if you apply for more cover you may need to provide this, especially for cover over $1 million. For those aged 16-24, in most cases you need to apply to the fund for cover.
Unit and fixed cover is available. With unit-based cover, the amount of cover you have decreases as you age but your premium doesn’t change. With fixed cover, your amount of cover stays constant but the premium you pay increases with age.
The PDS insurance documents on fund websites should provide detailed pricing of how both of these covers work, and you can check these to work out the cover you want.
How much cover will I need?
This also depends on your level of private health insurance, any social security or worker’s compensation you are eligible for, and the usual income and family circumstances.
If you have a spouse and dependents, and you suffer a disabling injury that requires constant care and/or modifications to your home, this can become quite expensive over a number of years.
If you have a mortgage and other debts, then the several hundred thousand dollars available via default cover in your super fund may not be enough. In that case, you will need to apply for more cover by contacting the fund, or consider other linked options inside and outside of super as we discuss below.
Claims and waiting periods in a nutshell
You can receive a benefit as a lump sum or income stream. Common waiting periods are:
- Three-month continuous absence from work.
- Six-month continuous absence from work.
However, there are some illnesses/injuries where there is no waiting period. Most funds apply no waiting period for heart attack, major head trauma, motor neurone disease, multiple sclerosis, dementia, Parkinson’s, severe burns, paralysis, loss of speech or hearing, and a few other major conditions. Generally, it requires two legally certified medical practitioners to certify that you will be unlikely to work again according to the occupation definitions.
Claims are one of the more controversial areas of TPD insurance. There have been quite a few stories in the media where members have, in their view, been denied a claim they were entitled to. This doesn’t necessarily represent the majority but it indicates the importance of knowing definitions and conditions, and keeping your cover and documentation up to date, if things go awry. Based on past statistics, the average TPD claim is between $100,000 and $150,000, with around 15,000 claims paid each year.
The TPD policy being owned by the fund means that any benefit is paid directly to the fund before they pass it to you. That means it will have to meet a condition of release as set out in industry regulations (SIS Act). Usually the Any Occupation definition will meet these conditions, but the Own Occupation often doesn’t – which is why it is not offered in super funds. This is because Own Occupation may not meet the SIS conditions unless a person is so severely disabled they are unlikely to ever work again in any occupation for which they are reasonably suited for by education, training and experience.
If you do receive a TPD payout, you will likely lose a portion of your life insurance (death cover) depending on your fund’s terms and conditions.
The recent Productivity Commission report into super made some interesting observations around TPD in super as it relates to fund members claiming.
A reason for inactive members being less likely to make a claim is that the eligibility criteria depends on whether they are working or not. It varies across funds, but to qualify for a TPD claim the terms may be:
- A member who is working or has been working inside a certain period such as six or 12 months, may be subject to a work test and need to demonstrate that they are unable to work — this may be in their own occupation (or an occupation for which they are suited), or any occupation.
- A member who has NOT been working inside a certain period may be assessed against an ‘activities of daily living’ (or similar) test whereby they are required to demonstrate that they are unable to independently undertake a number of activities, such as bathing, eating and dressing.
Although the second criteria are possibly more restrictive, premiums are generally the same regardless of work status. TPD insurance is thus of less value when you stop work.
According to MoneySmart, across the industry the claims acceptance rate for 2017/2018 was 86.3%, and the average claim time was 5.5 months. This can vary significantly by insurer though.
If for some reason you are not happy with a TPD situation inside super, the first step is to contact your fund directly and raise your issues. If this doesn’t help, you can then contact the Australian Financial Complaints Authority (AFCA). This may help if you believe premiums were incorrectly calculated, any information was misleading, or a claim has been denied, for example. A final step would be to engage a lawyer in extreme cases, but ideally due to the cost and stress involved, this is not a desirable option.
Innovating when it is needed
For some, the TPD definitions for insurance inside super may mean the cover is not ideal. The aim is to get the best cover, at the best price, with the best tax benefits to suit you.
Some insurers allows you the best of both worlds. They offer TPD cover where part of the premium can be funded inside super, yet provide TPD cover with an Own Occupation definition held outside super which may make claims easier. This type of cover allows you to benefit from the tax deductions of having TPD cover inside super, but at claim time, if you satisfy an ‘Own Occupation’ TPD definition but not an ‘Any Occupation’ definition, the benefit will be paid to you outside super so that you avoid having the benefit potentially being stuck inside super. This is a viable alternative to only having TPD ‘Any Occupation’ cover inside super.
Insurers also have another option where you can split the ownership between super ownership (Any Occupation) and self-ownership (Own Occupation). If there is a claim, however, it will be assessed under Any Occupation first, and if that doesn’t apply then Own Occupation.
Keeping an eye on tax
Premiums are tax deductible to individuals for Any Occupation, however they (and the fund) must meet the provisions of superannuation disability benefits as set by the ATO. For Own Occupation, as its broader definition does not meet the ATO’s conditions fully, the premiums are not fully deductible. Only 67% is deductible, but 80% is if Own Occupation is combined with life cover.
For benefit payouts, there is no tax payable if you are aged 60 or over. For under 60, the amount of tax paid depends upon age. If you are under 55, then a portion of the benefit will be tax free, while the remainder will be taxed at up to 21.5% (including Medicare Levy). Service days – the number of days from when you joined a fund – comes into the equation as well for calculating tax, so best you engage a financial adviser in this situation.
Your checklist for TPD
To ensure you have the right TPD cover:
- Jump online and check your coverage on your fund’s website.
- Assess your personal and financial situation – if you were to be permanently injured or severely disabled, will you and your family have enough income to survive and pay off any debts?
- If you need more TPD insurance, either apply for more via your fund or consider linked or standalone policies outside of super.
- Read the definitions, exclusions and release conditions closely in the PDS document to ensure there are no nasty surprises should you ever need to make a claim.