A permanent illness or injury can make it difficult or impossible to return to work. TPD insurance can offer a financial safety net to help support you and your family and pay for medical and rehabilitation costs.
What does TPD insurance cover?
TPD insurance pays a lump amount if you become totally and permanently disabled due to illness or injury.
Each insurer has a distinct definition of what it means to be totally and permanently disabled. Therefore, it can cover you for either:
- Your occupation — you cannot work again in the job you were held before your disability. This insurance cover is more expensive and is usually only available outside super.
- Any occupation — you are unable to work ever again in any job suited to your experience, training or education. This insurance cover is cheaper but has a higher threshold to claim, so it’s less likely to payout.
- Read the product disclosure statement (PDS) to know how your insurer defines a total and permanent disability. Subsequently, call the insurer or your super fund if you have questions regarding the policy.
How to decide if you need TPD insurance.
When contemplating whether you need TPD insurance and, if so, how much, consider the expenses you would need to cover if you were permanently disabled and could not work. These may include:
- living expenses for your family and yourself
- repayment of debts like a mortgage or car
- rehabilitation and medical costs
- savings to have for retirement
Also, consider what assets you have that could help pay for these costs. Assets may include:
- private health insurance, which can help cover medical expenses
- Income protection or trauma insurance can help replace lost income. You may hold these insurances via your super fund, savings or assets; you could sell
- support from family or friends that may be available
The difference between your amount and the amount you will need can guide how much TPD cover you may need.
If you need help deciding on TPD insurance and the amount you need, seek advice from a financial adviser.
How to purchase TPD insurance
Check if you already possess TPD insurance through your super. Most super funds offer default TPD cover cheaper than buying it directly. In addition, you can raise your level of cover via your super fund if required.
You can also purchase TPD insurance from:
- financial advisers
- insurance brokers
- insurance companies
TPD insurance can be purchased on its own or packaged with life cover.
TPD insurance premiums
You can typically pay for TPD insurance by choosing either:
- stepped premiums — recalculated at each time the policy is renewed. These premiums usually increase each year established on the more likely chance of a claim as you get older.
- level premiums — charge a greater premium at the beginning of the policy. However, the changes to cost aren’t based on your age, so increases happen more slowly over time
Your choice of stepped or level premiums significantly impacts how much your premiums will cost now and in the future.
Compare TPD insurance policies.
Before buying TPD insurance, compare policies to ensure you get the most suitable one for you. Check:
- whether it covers ‘your own occupation’ or ‘any occupation.’
- waiting periods before you can claim
- limits on cover
- premiums – now and in the future.
A less expensive policy may have more exclusions, or it may become more expensive in the future.
What you need to tell your insurer
It would help if you told your insurer anything that could impact their decision to provide you with TPD insurance. You need to provide this information when you apply, renew or change your level of cover.
Insurers usually require information about your:
- medical history
- family history, such as a history of the disease
- lifestyle (for example, if you’re a smoker)
- high-risk sports or hobbies (such as skydiving)
If an insurer does not request your medical history, it may mean their policy has additional exclusions or narrower policy definitions.
The information you provide will assist the insurer in deciding:
- if they should insure you
- how much your premiums will be
- terms and conditions for your policy
It would help if you answered the questions truthfully. Providing misleading answers could lead an insurer to reject a claim you make.
Tax on TPD Claims
Most people quickly realise that you will have to pay tax on your withdrawal when making a TPD claim or superannuation claim unless you are aged 60 and over. To better understand tax and TPD claims, we will answer some burning questions concerning tax on TPD claims.
Is a TPD payout regarded as taxable income?
A TPD payout is not deemed taxable income. Although, if you withdraw part or the whole of your TPD payout from your super fund as a lump sum, you will be required to pay tax. The calculation varies for everyone, and if you have multiple super funds, the calculation may be different for each fund from which you make a withdrawal.
To Summarise, under the current ATO rules as of 24 December 2019:
- No tax is payable if you are aged 60 or over.
- Under 60, the amount of tax you will pay is determined by your age and your “eligible
- service date” (the date you became a member of your superannuation fund).
- If you have not reached your preservation age, then a portion of the withdrawal will be tax-free. The taxable portion will be taxed at 22%. If your preservation age has been reached (but are not yet aged 60), you can withdraw up to
- $210,000 tax-free.
- If you withdraw more than this amount, a portion of the additional withdrawal amount will be tax-free, and the taxable portion will be taxed at 22%.
1. Withdraw the total amount out, including your Super balance and close your account.
2. Partial withdrawal to pay bills and legal fees and keep the rest in your super account.
3. Rollover the monies into a Superannuation offering a disability/income stream with a
Superannuation funds have a complex formula for tax on the withdrawal of your TPD benefit and account balance. You should. Obtain professional financial advice when making a TPD claim.
Vogue Advisory Group – is here to help you!
Contact Vogue Advisory Group today to learn more about tax on TPD payouts.