Know Risk is a community education program designed by the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) to improve our understanding of insurance and how it relates to managing the many risks we all face in life.
What is Total Permanent Disability cover?
Ever thought how much it would cost if you were in an accident and couldn't work anymore?
While life insurance policies generally cover you in the event of your death, they typically don’t cover you in the instance of a permanent disability. This is where Total Permanent Disability cover, (TPD) comes in. TPD covers you, if you become totally and permanently disabled as a result of an accident or illness and are never likely to return to work again. It will not cover any temporary disability or disablement. The key words to understand with this cover is that in order to make a successful claim you need to be ‘Totally’ and ‘Permanently’ disabled. TPD cover can be bought with a Life Insurance policy or by itself, and can be issued as a ‘rider’ policy to a life insurance contract or as a standalone policy. Claims will generally be paid as a lump sum payment.
Being affected by a disability is a daunting thought. Long-term disability is something none of us wish to think about. The idea that you will never be able to work again or even live the way you are used to is difficult to understand.
While the chances of suffering from a long term disability may appear to be small, the financial burden of this can be massive. Some of the financial pressures can be removed if you have the right cover in place. Many of us don’t think about what changes we would need to make if for some reason our ability to work and earn an income was totally removed for the rest of our lives. Expenses not only come in the form of ongoing medical and rehabilitation costs or the cost of home modification or lifestyle changes, but also from the day to day living costs that we take for granted.
TPD definitions: what you need to know
As with all insurance policies, you need to understand exactly what kind of cover you are purchasing. The definitions of cover differ and will determine how you are covered and under what circumstances you may be paid.
Policy definitions for TPD insurance are typically either “own occupation” or “any occupation”. With an “own occupation” policy, if you are injured and no longer able to perform the occupation you were working in at the time of the before the injury or illness occurred, you would be eligible for a payout.
“Any occupation” on the other hand has a broader definition and usually means that in the case of a permanent disability, you need to be deemed unable to perform any occupation. So although you may not be able to do the job you were already in, you may still have the ability and skills to be able to do something else and will therefore likely not receive a payout from a claim.
“Own occupation” is generally the preferred policy option but it is not available for all occupations and premiums will also generally be higher.
Some life insurance companies offer a third definition aimed at people who do not work, a ‘home maker’ definition. Often people do not appreciate the importance of the home maker to the primary income earners’ ability to work and earn income. What would happen to a workers income if, due to the incapacity of his/her partner, they needed to take time away from work to act in a career capacity? Or, what additional and ongoing medical and rehabilitation or lifestyle change costs would be incurred? For these reasons, having a TPD policy in place for a home maker deserves careful consideration.
Working out how much cover you need
The amount you are covered for in the event you need to make a claim will affect the price you pay for your policy (your policy premium). Generally, you want to ensure your policy offers enough cover to pay off any mortgage and debts, with additional funds on top of this to pay for ongoing medical and rehabilitation costs as well as to replace lost income for daily living expenses.
All policies will vary on how much they cover and under what circumstances. When thinking about renewing or purchasing your life insurance policy, keep TPD cover in mind. Remember, always shop around and find a policy that suits your individual situation, ensure you always read the Product Disclosure Statements and ask questions for clarity, when in doubt, seek independent financial advice.