In this guide
Imagine for a moment what would happen if an illness or disabling injury meant you couldn’t ever work again.
For most of us, the financial picture would be bleak.
It’s just that scenario that total and permanent disability (TPD) insurance available through your super fund is designed to address.
What is TPD insurance?
Total and permanent disability insurance pays a lump sum if you are sick or injured and unlikely to be able to return to work. Some policies pay a series of instalments instead of a single lump sum.
For you to receive a payment, the insurer must be satisfied that you meet the definition of TPD in the insurance policy.
The two most common TPD definitions are known as ‘own occupation’ and ‘any occupation’.
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‘Own occupation’ means your illness or injury is likely to prevent you from returning to your own job – generally the occupation you were performing immediately prior to your disability. This definition is not available when your insurance is held in a super fund unless you already had the policy before 1 July 2014.
‘Any occupation’ means you are unlikely to return to any occupation that suits your education, training or experience. If you can’t return to the job you were doing before your disability but have suitable experience and skills to get a different job, then a TPD policy using the any occupation definition would not make a payment to you.
Other definitions are often used if you were not working or were working limited hours immediately prior to your disability. These can include:
- Cognitive loss
- Loss of limbs/eyesight
- Activities of daily living – the loss of abilities like dressing, showering and eating independently
- Activities of daily working – the loss of abilities like walking, communication, lifting, hearing and manual dexterity.
It is important to read the product disclosure statement (PDS) that explains the insurance cover you have or are applying for to understand what each definition is and when they apply, as well as the other terms and conditions. You can usually find this information in the insurance guide that forms part of your super fund’s PDS.
If you need cover with an own occupation definition, you must apply for it outside your super fund.
The expenses that your TPD policy should cover
For financial security, the amount of cover you choose should be enough to:
- Pay off any debts
- Provide necessary income for ongoing living costs that you have not covered with an income protection policy, from your current age until retirement age
- Cover lump sum expenses associated with modifying your home to accommodate a disability
- Meet the cost of future out-of-pocket medical expenses, such as in-home nursing care.
Since none of us are psychic, we can’t know for sure what future home modifications or medical needs will cost for an injury or illness we haven’t yet developed. The sum you choose to set aside for these costs is personal and depends on what is enough to put your mind at ease, but not so much that your insurance premium is unaffordable.
TPD cover and income protection insurance work together, and you can receive payments from both if your illness or injury means you are unlikely to return to work. The level of income protection you have and the period it will continue to provide payments determines whether your TPD policy needs to include an allowance for future income, and how much.
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Remember that if you plan to use your TPD payout to pay off debts, then the income you need may be lower than it was prior to your disability because you will no longer need to make repayments.
And then there’s tax. As TPD payments from super are taxable, you may need to increase your cover so the amount you receive after tax is sufficient for your needs. Outside super, TPD payments are tax free.
Help calculating the TPD cover you need
Now you know what expenses to consider, how can you then decide the dollar figure of TPD insurance to apply for?
Estimating the debts you’ll need to repay is usually straightforward, but working out the lump sum you’ll need to invest now to fund your future income is trickier.
Thankfully, an insurance calculator or your financial planner can help.
Check whether your super fund provides an insurance needs calculator that can give you a tailored result based on the cover your fund offers. These tools can often also tell you what the cover would cost with them.
Alternatively, we found a helpful tool provided by AIA, one of Australia’s largest life insurers. This calculator considers the income your selected income protection will provide and adjusts your required TPD cover accordingly. You can choose between income protection benefit periods of two years, five years and to age 65. The tool also assumes you or your family will use your assets (including your super balance) to help repay your debts if you become permanently disabled or die. If you want to keep your assets for the future instead, you can adjust the sum insured for debt repayment in your results.
Adjusting your cover to allow for tax
Holding TPD cover in your super account is convenient because premiums can come out of your balance. You can also make concessional contributions to super from your pre-tax income (salary-sacrifice or personal deductible contributions) to cover the cost, effectively making your premiums tax deductible. Outside super, TPD premiums are not tax deductible.
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One downside is that if you make a successful TPD claim, the amount is taxable when you withdraw it from super before your 60th birthday. The tax you pay depends on your age when you were disabled, the eligible service date on the super account you’re withdrawing from, the existing tax components in your account and whether you withdraw a lump sum, a regular income stream or a combination of both.
With so many moving parts, there is no easy rule of thumb to estimate the cover you need for the after-tax amount you require.
To help you, we’ve created a calculator that will estimate the amount of TPD cover required in super to provide the amount you’ve chosen as a lump sum after tax is paid.
TPD cover calculator
Instructions
- Enter your information in all fields.
- You will need to contact your super fund for your eligible service date.
- The after-tax amount you want to receive from your lump sum TPD payment should not include your current super balance.
- Select “Show results”.
Assumptions
- Your cover will be held in a taxed super fund.
- You will keep your current balance in super until at least age 60, to draw on for retirement.
- You will withdraw the entire insured amount as a lump sum.
- Calculations are based on you becoming disabled today.
The tax calculation changes as you age, along with your debts and expenses, so it’s important to regularly revisit how much you need and adjust your cover to suit.
If you successfully claim a TPD benefit from super in the future, the right steps can reduce the tax you pay.
Other features of TPD in super you should know about
Default cover
When you join a super fund, you often receive insurance cover without applying for it or answering any medical questions.
To receive default cover when you join a new fund, you need to be 25 or older and have a balance of at least $6,000. If you don’t qualify when you join, your default cover may turn on when you do.
Under laws designed to prevent insurance premiums eroding your balance, this default cover can be cancelled if your account is inactive for 16 months or more. Before cancelling, your super fund will contact you to ask if you want to keep it.
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Find out morePre-existing conditions
In some cases, the default insurance a super fund gives you will exclude pre-existing conditions. Pre-existing conditions are health conditions or injuries you had before your insurance started. This is known as limited cover.
Limited cover commonly applies if you didn’t join the super fund shortly after starting work with the employer that first contributed to your account, or if you were not working consistently in the months before you joined. It often becomes ‘full cover’ after two years if you’re employed and regularly attending work at that time. Full cover includes protection for pre-existing conditions.
Super funds use limited cover to protect against people who might join the fund to take advantage of the default cover when they already know their health is deteriorating. You should carefully read your fund’s insurance guide to understand when limited cover applies and when it ends.
Premium costs
Every super fund has different insurance premiums, so it’s worth shopping around. Usually, costs vary depending on the type of job you have (office or manual work) and some funds also charge different premiums for smokers versus non-smokers.
Bundled cover
Many super funds only offer TPD cover bundled with death cover. Bundled cover means you’re covered for death and TPD together, so you can’t have a lower insured amount for death than for TPD. This can be frustrating if you don’t need death cover because you don’t have any dependants or if you need more TPD cover than death cover.
Even when death and TPD cover are not bundled, a successful TPD claim can reduce your death cover by the amount you have claimed. Your fund’s insurance guide has all the details.
Increasing your cover
If you don’t have any TPD insurance in super or you need more, you can apply for additional cover. Since TPD and income protection work together, you might want to apply for the income protection you need to complement your TPD cover at the same time.
You can usually apply online after logging in to your super account through your fund’s website. You may be able to apply for a fixed dollar amount or choose units of cover where each unit is worth a set amount. When insurance is issued in units, the value of each unit may change as you age. Check your fund’s insurance guide for the details.
You will need to answer questions about your health and pastimes. Depending on your answers and the amount of cover you’re requesting, you may also need to complete blood tests or see a doctor for a physical examination. This process is called underwriting.
When underwriting is complete, you will be contacted to confirm whether your request for additional insurance has been approved, rejected, or approved with conditions. Conditions could include an exclusion for a condition you’ve experienced before or an additional premium to reflect the extra risk of a claim due to existing health problems.
Before applying for more cover, check what you already have. If you have more than one super account, you may also have multiple insurance policies. Most funds offer you the option of transferring the insurance attached to another account if you commit to cancelling the original policy after the transfer.
7-step checklist for the right TPD cover
- Imagine your personal and financial situation if you were to be permanently injured or severely disabled. Estimate the TPD cover you would need based on the guidance above. Remember to adjust the required sum insured in super to account for tax.
- Visit your super fund’s website(s) and log in to check the TPD cover you currently hold.
- Review your fund’s options for increasing or tailoring your TPD cover, including transferring existing cover from your other super fund(s).
- Investigate the cost, terms and conditions, and policy definitions of TPD cover with your super fund and any other funds you are considering.
- Compare the TPD policies you have identified in super with policies outside super, including costs, terms and conditions, and definitions.
- Consider talking to your super fund or an independent financial adviser for personalised advice about your insurance needs.
- Apply for the TPD cover you have decided on with your chosen provider, along with any income protection to complement the sum you have chosen. You may also wish to apply for death cover simultaneously.
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