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It's bad enough to have an accident or become sick and find yourself without an income, facing hefty medical bills. It's even worse if you are not insured. And yet by Financial Services Council estimates, some 95 per cent of Australian households are underinsured.

Of course insurance isn't just about life and death. What if you were to become incapacitated, for example? That’s where total and permanent disability (TPD) insurance is important.

What is TPD?

Depending on your specific policy, TPD pays out when you are unable to work in either your own or any occupation for which you are suited by training, education or experience. The policy can deliver a lump sum to help pay off your debts, provide the money for medical costs, and/or to invest so you have a future income stream.

You need to check what illnesses or injuries are included in the TPD policy as each one will be different. Policies may cover the impact from stroke, heart disease, cancer, motor vehicle accidents, musculoskeletal disorders, amputations and loss of eyesight, as well as mental illness which comes in many forms and affects many age groups.

And TPD differs from income protection insurance because you need to be permanently disabled to receive a payout.

Working for you

Generally, TPD is bundled with term life insurance but in some cases it can be taken as a stand-alone policy. This is particularly useful if you are single with no need to leave money to a beneficiary on your death but still want funds should you no longer be able to work.

On the latest available figures, one in every 2,022 people who have a TPD insurance policy made a claim over the period 2005-09. Add to that number those Australians who don’t have cover in place and the number affected by no longer being able to work is significant. Clearly it makes sense to incorporate TPD insurance into your risk management strategy.

Building a stronger future

Many people take out TPD insurance through their superannuation as the premiums are tax deductible. This means you can get more cover for your money than paying out of your post-tax income. But there may be issues when it comes to getting money out of the fund, which is why it is good to get advice.

This advice is important because not all TPD policies are the same. The first decision is whether your policy will pay out if you cannot perform your “own” occupation or if you cannot perform “any” occupation, although some policies do offer a combination.

This difference is significant. “Own” occupation is more specific than “any”, invariably costs more, and may only be available for professionals. Say you are a heart surgeon and lose a hand; clearly you can no longer operate. But perhaps you had previously lectured a job to which you could return. If your policy is worded “own” then you could still make a TPD claim; if your policy is worded “any”, then you might miss out as you can still work as a lecturer.

But while “own” appears to be a more favourable definition, it can lead to problems if you take your TPD policy through your superannuation. The law which governs superannuation funds restricts immediate payment to those claims meeting the “any” occupation definition, which could mean TPD proceeds remain in the fund until you meet a condition of release such as retiring on reaching preservation age (55). This may be an argument for holding some TPD insurance outside super.

Supporting all the family

Unlike income protection insurance, you don’t just have to be in the workforce to take out TPD so it is particularly useful for homemakers. After all, if you could no longer look after your family, your spouse might have to leave work or else employ somebody to take over your role. A TPD payout could cover these costs.

If you want to know which TPD insurance cover is best for you and whether you should hold it within or outside super, please contact us on 03 9591 8000 to arrange your Financial Review Meeting so we can discuss TPD and other insurance options with you.

What they say

Chris’ proactive approach to financial planning has put my family in a much stronger position. With his help and advice, we believe we can build upon this foundation so that our future is financially secure.

Gary
Mulgrave Vic

5 Min Financial Health Check

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Want to explore your options? Email us, or give us a call on (03) 9591 8000.

Christopher Connolly (280099) and Connolly Wealth Management Pty Ltd (333350) are Authorised Representatives of WealthSure Financial Services Pty Ltd AFSL 326450

The information contained within the website is of a general nature only. Whilst every care has been taken to ensure the accuracy of the material, Connolly Wealth Management will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.

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