TPD vs Income Protection

The fundamental differences between TPD and Income Protection is that TPD coverpays you a lump sum benefit in the event you are unable to return to work due to being totally and permanently disabled. Income Protection generally provides you up to 75% of your monthly income if you are unable to work for a period of time due to sickness or accident.

One of the key differences is that Income Protection looks after your future expenses should you be unable to work, while people usually use the lump sum TPD (Total and Permanent Disability) benefit to pay off debts or provide for their immediate needs that resulted from the disability and to cover future costs.

Lump Sum TPD Payment or Monthly Benefit of Income Protection?

Your greatest asset is your ability to work and provide for your family. It’s important that you carefully review your options before choosing protection against the loss of this ability.

Things you should know before you start understanding the pros and cons of each:

Let’s review each cover with a special focus on their individual strengths and weaknesses.

Income Protection Pros and Cons

You mainly have three types of Income protection policies:

Indemnity value

Your monthly benefit will be based on the lessor of 75% of your pre-disability income or your monthly benefit.

Agreed value

The monthly benefit you receive is generally fixed (where you have provided your financial evidence at application time to justify the monthly benefit) and will not reduce with any future changes in your income.

Guaranteed agreed value

A new term used by select insurers. Basically, it is the same as an agreed value policy however they will add the term “Guaranteed / Endorsed” to your contract / policy terms once you have provided financial evidence to justify your pre-application income, thus confirming your monthly benefit.

Pros Cons
Pays a monthly income when you’re unable to work due to sickness or injuries, ensuring you have income to pay your bills each month. You only receive 75% of your monthly salary.
The focus is not merely on the “deficit”, but rather about the impact the condition will have on your ability to perform your important income producing duties of your occupation Income protection policies are typically more expensive as they offer very broad coverage. Generaly, any sickness or accident that keeps you off work longer than the waiting periodis covered. .
Covers you for short-term sickness as well as permanent incapacity. The waiting period needs to lapse before you start to accrue your monthly benefit.
There are far more claimable events, and you can submit multiple claims. Only insures your personal exertion income, therefore if you don’t have any you generally can’t get income protection.
Easier to claim on because you do not need to establish permanent disability and generally the waiting period for a claim is shorter. If, while waiting for your claim to be paid out or on claim you pass away, the income protection policy will cease and generally only pay a nominal 6 x your monthly benefit up to $60,000.
Premiums are tax deductible. Any monthly benefits paid to you needs to be declared on your tax return as the benefits paid to you are tax assessable

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TPD Pros and Cons

Please remember if you do purchase TPD, ensure you are aware of the 4 potential TPD definitions of cover and know which one pertains to you.

  • Own occupation: You receive a lump sum benefit in the event you are no longer able to return to work in your own occupation due to total and permanent incapacity. Meaning, you can still receive the benefit if you’re able to work in another occupation.
  • Any occupation: Pays out if it is evident you’ll not be able to ever work in any type of occupation ever again. If you are still able to perform work in an occupation reasonably suited to your training, education or experience, the lump sum benefit will not be payable.
  • Home duties: Pays you a lump sum benefit if you are totally and permanently disabled and unlikely to return to normal domestic duties. For example cooking family meals or doing the laundry.
  • Modified (activities of daily living): TPD pays out a lump sum if you are completely unable to perform 2 of the 5 normal daily activities such as bathing, eating and drinking or dressing and undressing.
Pros Cons
You receive the entire lump sum benefit. A Lump sum can be difficult to manage, especially as you need to ensure it lasts you for your entire working career and potentially longer.
A lump sum enables you to make provisions, including property and workplace adaptations, for example modifying your car or house. Only covers you for complete and permanent incapacity / disability. The claims assessment process can thus be time-consuming and difficult.
Large sums insured is available. Temporary disability is much more likely to occur than total and complete disability, making valid claims difficult.
Generally cheaper than Income Protection. TPD does not account for the unpredictability of inflation and investment risk. The lump sum is based on predictions of the future and can thus not ensure that the cover amount will be enough should you become disabled in the future.
You can enhance your policy with multiple policy options. Generally, there is no possibility of multiple disability claims.
You have a choice of TPD definition as mentioned above: Own occupation, Any occupation, and Modified or Home duties. You MUST have that sustained the particular TPD definition in your policy to receive the benefit.
Premiums are deductible to your super fund if an any occupation TPD cover is purchased through your superannuation. Own occupation definition is not available in your super fund, and for policies taken out in your own name, premiums are not deductible

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Can you claim on both your income protection and TPD policy?

Yes, if you meet both your income protection and TPD policy definitions. However, the monthly benefit you’ll receive from your income protection will depend on your policy definition. Select polcies have an offset clause’s for lump sum benefits paid for the same condition and may reduce your monthly benefit accordingly. This will depend entirely on where the lump sum benefit came from and the offset clause (refer to the PDS) of your policy.

Do I need both Income Protection and TPD cover?

Yes, you should consider purchasing both because combining TPD and IP can save you money. However if you have a comprehensive IP policy with a benefit period up to age 65 or 70, you may be able to reduce the level of TPD cover you need. However, it will depend on your liabilities and obligations.

TPD Cover is not a substitute for Income Protection insurance

You may need higher levels of TPD cover if you only have an income protection policy that has a short benefit period of 2 or 5 years. Therefore, you should consider having both types of cover and when you combine your TPD with your IP cover you can often get further discounts on your premiums.

The importance of sufficient disability cover is indisputable, let us help you in determining which cover will best serve your needs.
Published: March 17, 2017

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