Total and Permanent Disability Insurance (TPD) provides a lump sum payment if you suffer a disability before retirement and can’t work again, or if you can’t work in your usual occupation or chosen field of employment. Payments under a TPD policy are generally not made until the insurer believes that you are unlikely to work again. This usually occurs only after you have been unable to work for at least six months.
Provides a cash lump sum that can be used by your family to:
- Repay debts such as your home mortgage and other loans
- Replace your income
- Meet medical costs
- Meet the costs of a modified lifestyle, e.g. nurse or carer and home and car modification
Can be purchased as an add on, or as a stand alone policy
- You can buy TPD as an add-on to life insurance, known as linked life and TPD insurance, or as a stand alone product
- You can also get TPD as an extra benefit from your superannuation fund or as part of a trauma insurance product
There are different TPD definitions
You should consider which of the definitions best suit your particular situation.
Own occupation: you will be entitled to claim if you are unable to return to your ‘own’ occupation
Any occupation: you will only be entitled to claim if you are unable to return to ‘any’ occupation to which you are reasonably suited by education, training or experience
Note: ‘own occupation’ is more generous and therefore more expensive than ‘any occupation’
Note: The cost and availability of cover is directly related to your specific occupation. Consideration will be given to any risks associated with your job and how much you work, whether you are part-time or casual.
TAX TREATMENT & TPD INSURANCE CLAIMS
- Premium Deductibility – TPD premiums are not tax deductible
Taxation on Benefit Payment – Tax-free if paid to the injured person or their relative
- Premium Deductibility – Premiums are tax deductible for the superannuation fund
- Taxation on Benefit Payment – A disability superannuation benefit may be paid as a lump sum or as an income stream
- Lump Sum Payments to a recipient over age 60 from a TPD benefit are tax-free
- Lump Sum Payments to a recipient under age 60 from a TPD benefit are taxed on the taxable component of the account but not the tax-free component. The tax-free component of the benefit is increased for the future service benefit, broadly reflecting the period where the recipient would have been expected to be work until, in general to age 65
- Income Stream payments to a recipient over age 60 from a TPD benefit are tax free from the Taxed element of the account and are taxed at their Marginal Tax Rate (MTR) less a 10% tax offset on the Untaxed element
Income Stream payments to a recipient under age 60 from a TPD benefit are at their MTR less a 15% tax offset on the Taxed element of the account. There is no tax offset available on the Untaxed element of their account and payments are taxed at their MTR
HOW MUCH TPD COVER SHOULD I HAVE ?
When considering how much cover you need, you should think about:
- Your financial commitments, what are they and how long will they last
- Repaying your debts
- Allowing for an increase in your expenses to cover the cost of ongoing care
- A lump sum amount to help cover the cost of any home modifications
- Whether any assets will be sold to help pay for these expenses
- Affordability of the cover reflected on your TPD Insurance Quote
You should also consider:
- Stepped premiums increase each year according to your age and the likelihood that you will make a claim and therefore they increase significantly as you get older.
- Level premiums are calculated based on your age when your cover starts. You can lock in a fixed rate for your insurance cover.
- Initially, level rates are generally higher than stepped rates but over the life of the plan as stepped premiums increase, level premiums generally do not*. This may represent a significant saving, meaning you can maintain your premiums more easily as you get older.
- *Level premiums are not guaranteed and may change in the future due to rate, CPI and policy fee increases. Level premiums can alter to stepped at various ages, please ensure you refer to the current PDS.
- Typically ‘Level’ premiums are not available through a superannuation platform.
- Successful TPD claims may be affected by the quality of the product and insurer
- A TPD payout from a superannuation fund resulting from a total and permanent disability superannuation claim may be subject to tax