TPD vs Income Protection

TPD cover pays 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 regular monthly income if you are unable to work for longer than your waiting period due to a sickness or an accident.

Published July 17, 2019

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What is the difference between TPD and Income Protection insurance?

One of the key differences is in how the benefit payment generally gets used. Income Protection looks after your future expenses should you be unable to work. The lump-sum TPD (Total and Permanent Disability) amount can be used to pay off your debts or provide for any adjustments needed due to your disability.

Do you need TPD and Income Protection insurance?

Your greatest asset is your ability to earn an income and provide for your family. It’s essential that you carefully review your options before choosing which insurance policy suits your unique requirements.

You might want to consider purchasing both policy types because combining TPD and Income Protection can save you money. However, if you have a comprehensive Income Protection policy with a benefit period up to age 65 or 70, you may be able to reduce the level of TPD cover you need. But, it depends on your liabilities and obligations.

Types of Income Protection

You mainly have three types of Income Protection policies:

1. Indemnity value

Your monthly benefit will be based on the lesser of 75% of your pre-disability income or your monthly benefit. Financial evidence that proves your income is required at claim time.

2. Agreed value

The monthly benefit you receive is generally fixed. You must provide financial evidence of your income at application time to justify the monthly benefit. Your monthly benefit will not reduce with any future changes in your income.

3. Guaranteed agreed value

This a term used by select insurers, which basically means the same as an agreed value policy. However, the insurers will only 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.

Income Protection pros and cons

Advantages Disadvantages
Pays a monthly income when you’re unable to work due to sickness or injuries, ensuring you have an 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 the important income producing duties of your occupation. Income protection policies are typically more expensive as they offer a very broad of coverage. Generally, any sickness or accident that keeps you off work longer than the waiting period listed in your PDS.
Covers you for short-term sickness as well as permanent incapacity. Only protects your personal exertion income. Meaning, you don’t have any regular income, you generally can’t get income protection.
Easier to claim on because you do not need to establish permanent disability. Generally, the waiting period for a claim is shorter. If you pass away while on a claim or waiting for your claim to be paid out, your policy will cease. It will generally only pay 6 times 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 because the benefits paid to you are tax assessable.

TPD definitions

Make sure you are aware of the 4 potential TPD definitions and the one which pertains to you, as per your PDS:

TPD cover pros and cons

AdvantagesDisadvantages
You receive the entire lump sum benefit.A lump sum can be difficult to manage, especially because 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 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, your cover amount might not 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: Own occupation, Any occupation, Modified TPD or Home duties.You MUST have sustained the specific 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.For policies taken out in your own name, premiums are not deductible. Own occupation definition is not available in your super fund.

Can you claim TPD and Income Protection at the same time?

Generally, 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 policies have an offset clause for lump sum benefits paid for the same condition, which may reduce your monthly benefit accordingly.

This entirely depends on where the lump sum benefit came from and the offset clause as per your PDS.

TPD Cover is not a substitute for Income Protection insurance

If you only have an income protection policy with a short benefit period (2 or 5 years), you may need higher levels of TPD cover. Therefore, you might want to consider purchasing both types of policies. When you combine your TPD cover with your Income Protection policy under the same insurer, you can often get discounts on your premiums.

Do not hesitate to give us a call, if you need help deciding whether you should buy TPD cover or Income Protection, or both.

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