TPD vs Income Protection
Compare TPD and income protection insurance, two types of life insurance that can provide you with protection in case of illness or injury. While TPD insurance provides a lump sum payment for permanent disability, income protection insurance offers regular payments to replace your income in case you are unable to work. However, the suitability of each type of insurance depends on your individual circumstances.
Published May 4, 2023
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What is the difference between TPD and Income Protection?
The main difference between TPD and income protection insurance is the type of coverage they provide. TPD insurance pays out a lump sum if you become permanently disabled and are unable to work, while income protection insurance provides regular payments to replace your income if you are unable to work due to illness or injury. In other words, TPD insurance provides a one-time payment for permanent disability, while income protection insurance provides ongoing payments for temporary or permanent disability.
Factors to consider when deciding which option is right for you
- Level of debt and financial obligations: Your level of debt and financial obligations, such as mortgage payments or dependent care, can impact the amount of coverage you need and which option may be more appropriate.
- Age and stage of life: Your age and how close you are to retirement can impact the suitability of each option.
- Occupation and income level: The type of work you do and your income level can impact your insurance needs. For example, if you have a high-income job or work in a high-risk industry, you may want to consider both options to ensure you have adequate coverage in case of unexpected events.
- Current health status: Your current health status and any pre-existing conditions can affect your eligibility for coverage and the level of premiums you will need to pay.
- Existing savings and financial resources: The amount of savings and financial resources you have may also impact which option is right for you. For example, if you have a substantial emergency fund or other sources of income, allowing you to cut back on your income protection insurance requirements.
- Risk tolerance: Some people may prefer tacking out both however at a reduced amount, therefore allowing you to take on some of the risk yourself while still being covered if the illness or injury is more severe. Consider which option aligns better with your personal preferences and risk tolerance.
What Is Income Protection?
Income protection insurance is a type of policy that offers financial assistance if you experience an unexpected loss of income due to illness or injury. Typically, this insurance covers up to 70% of your pre-disablement income, which can help you pay for your monthly expenses. The benefit payment is paid out regularly until you can return to work, no longer meet the eligibility criteria, or until the end of the policy term, as specified in your Policy Disclosure Statement (PDS).
The level of coverage needed will typically vary depending on individual circumstances. Income protection insurance could be useful for those who rely on their income to support themselves and their loved ones, especially those who are self-employed or lack significant savings or annual or sick leave to fall back on in case of illness or injury. This type of insurance can provide financial security during a challenging period and help you manage your ongoing expenses while you recover.
What is TPD insurance?
TPD insurance provides a lump-sum benefit if you become totally and permanently disabled and cannot work in your current or any other potential occupation. This type of insurance is typically paid if your disability has prevented you from working for the past 3-6 months and results from an accident or illness. The lump-sum payment can cover medical expenses, pay off debts, or provide ongoing financial support.
TPD definitions
Make sure you are aware of the 4 potential TPD definitions and the one which pertains to you, as per your PDS:
- Own occupation: You receive a lump sum benefit in the event you are no longer able to permanently return to work in your own occupation due to total and permanent incapacity.
- Any occupation: Pays out if it is evident you’ll not be able to ever work in any occupation reasonably suited to your training, education or experience.
- Home duties: Pays you a lump sum benefit if you are totally and permanently disabled and unlikely to ever 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. For example, bathing, eating and drinking or dressing and undressing.
Compare features of TPD and Income Protection
| Income Protection | TPD Insurance | |
|---|---|---|
| Benefit | Monthly payments up to 70% of regular income | Lump-sum payment |
| Eligibility | Unable to work due to illness or injury | Totally and permanently disabled, unable to work in current or potential occupation |
| Waiting period | Between 14 days and 2 years | Typically 3-6 months |
| Benefit period | 2 to 5 years or to age 65 | Definition of TPD typically changes at age 65. |
| Premiums | Based on age, gender, occupation, waiting period, benefit period, monthly benefit, premium type and health status | Based on age, gender, occupation, health status, disablement definition, premium type and benefit amount |
| Taxation | Premiums typically tax deductible, Benefits are usually taxed as income | Premiums typically not tax deductible, Lump-sum payment is generally tax-free because it is not considered income |
| Use of benefit | Covers ongoing expenses during disability | Covers medical expenses, debts, or ongoing financial support |
Do I need TPD and Income Protection Insurance
Your ability to earn an income is one of your most valuable assets, providing for both you and your loved ones. When choosing insurance policies, it’s essential to review your options carefully to find the ones that best meet your requirements. Combining cover like TPD and Income Protection policies could save you money, but it depends on your specific circumstances. For example, if you have a comprehensive Income Protection policy with a benefit period up to age 65 or 70, you may not need as much TPD coverage. However, it’s important to consider your liabilities and obligations and seek professional advice before making any decisions.
Can you claim TPD and Income Protection at the same time?
If you meet the policy definitions for both your Income Protection and TPD insurance, you can usually make claims for both simultaneously. However, the amount of monthly benefit you receive from your Income Protection policy may be affected by any lump sum payments you receive under your TPD policy. Some policies include an offset clause that reduces the monthly benefit payment by the amount of any lump sum payment made for the same condition. The specific details regarding any offset clause’s can be found in your Policy Disclosure Statement (PDS).
TPD Cover is not a substitute for Income Protection insurance
While TPD cover provides a lump-sum payment in the event of total and permanent disability, it is not a replacement for Income Protection insurance. If your Income Protection policy has a short benefit period (2 or 5 years), you may consider purchasing higher levels of TPD cover. Combining TPD cover and Income Protection insurance under the same insurer can often result in premium discounts. Therefore, it may be worth considering both types of policies to ensure you have adequate protection in the event of an unexpected illness or injury.
Frequently Asked Questions and Answers
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Can you claim tax on TPD and income protection?
Yes, under certain circumstances, you may be able to claim a tax deduction for the premiums you pay for income protection insurance held in your personal name typically. However, TPD premiums typically won’t be deductible to your super fund if held and funded by your super fund. implications can vary depending on the policy ownership structures and your individual circumstances, so it’s best to seek advice from a tax professional. -
Can you have TPD and Income protection inside super?
Yes, it’s possible to have both TPD (Total and Permanent Disability) and income protection insurance inside superannuation. Many super funds offer insurance as part of their packages, including TPD and income protection. -
Which option is best when self-employed and unable to return to work?
When you’re self-employed and unable to return to work due to illness or injury, income protection insurance can provide a financial safety net to help you manage your expenses while you’re unable to earn an income. TPD insurance, on the other hand, pays a lump sum if you’re totally and permanently disabled and can no longer work. The option that’s best for you depends on your specific circumstances, such as your level of savings, financial commitments, and the nature of your work. It’s recommended to seek professional l advice to determine the best option for you.
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Hello, I have received a TPD payout from Rest Super in 2017, My policy did contain income protection as well but I only claimed for the TPD. At the time of the claim I was somewhat confused about the process. I stopped work in 2012 but was not aware of my claim rights until 2016 as i was first advised by Rest super in early 2013 that i did not have any cover with them for either TPD or Income protection. Prior to this claim i received a TPD payout from another fund in 2013 and have been on a Disability Support Pension since early 2013. My question is can i still claim for the income protection component of the policy I had with Rest Super and if so how would or could it be paid (regular payments and if so would it be backdated or lump sum) also how would it be deemed by Centrelink and how would it affect my DSP payments and would I have to pay back centrelink for past payments? At the time of my disablement I was 54 and I am now 59 the policy with Rest Super allowed for income protection to age 60.
Dear Mr Smith
This is a very interesting scenario and one we see fairly frequently when the claimant was not aware of their full entitled benefits under the policy. Firstly it is generally possible to lodge an income protection claim in arrears however the longer the duration of time the more difficult the task.
Initially I would track down all your paperwork from that time, then confirm with the underlying insurer at the time / Rest Superannuation of you situation and that you would like to potentially lodge a late claim. It would be important to understand if this is possible under the policy terms and conditions as I can imagine your policy is no longer in force.
Secondly you will then need to provide medical evidence to support that you have continuously met the policy claim conditions under the policy for the duration of time you want to claim benefits for. The best way for you to do this is get a copy of the Rest income protection claim forms (full copy) then you can request your medical history logs from Medicare, then you can contact the relevant medical professionals listed on the Medicare file and ask them for a copy of your file. This would be a good starting point, you will then have to confirm with the claims team at Rest the additional information they may require including fully completed claims forms and potentially past tax returns to prove you have not been in any gainful occupation during the time.
Should your back dated claim be successful I am not sure how they would make the payment to you & or the implications this would have on your past or present Centrelink payments, however I would imagine that if the salary continuance policy covered 75% of your pre disablement income it would collate to more than your previous DSP payments.
Therefore I would contact Centrelink directly to understand any potential implications and how these payments would be treated.
Regarding TPD vs IP until 65, when would I claim IP for 5-40 years and not be eligible for TPD?
I currently have TPD and IP for 2 years, and my wife TPD and IP until 65. I’m not sure if I should increase mine or reduce my wife’s.
Hi Iain,
Thank you for asking this very important question.
Because I don’t know you and your wife’s personal circumstances I’m not able to give you a definitive answer. However, it’s important that you focus on the key differences between TPD and Income Protection before making a decision.
Claiming for TPD vs Income protection
TPD is very difficult to claim for because of its conclusive definition; generally you have to be totally and permanently disabled and not be able to do ANY work. You’ll also need the written confirmation from at least two medical specialists to confirm you are indeed totally and completely disabled and unable to work in ANY Occupation.
Income Protection pays out a benefit when you or unable to perform at least one income generating duty for a period of time. Generally, a claimable event is an accident or illness that prevents you from performing duties in your OWN occupation.
For example, if you’re a truck driver and break your leg so badly you cannot drive for months, you will not qualify to claim for TPD, but you should be able to get a monthly benefit from your income protection policy.
When receiving a claim for IP you are still eligible to claim for TPD if meeting the strict definition as stated in your product disclosure statement (PDS). Therefore, TPD is not a substitute for Income Protection.
If you have comprehensive Income Protection cover you could reduce your TPD cover, however, even when you have sufficient TPD cover, it is usually not recommended that you reduce your IP because of how difficult it is to claim for TPD.
If you require any further clarification please contact our team on 1300 135 205.
I would like to compare our current cover (Life Insurance to 1 million) and Income protection ($10,000 until 65 years of age – waiting period 90 days). I am confused whether my husband needs TPD – he owns his own business and has had cover for 10 years.
Hello Jen,
Thanks so much for your question.
Okay, let’s break it down:
• Life insurance pays a lump sum amount should your husband pass away or be diagnosed with a terminal illness.
• Income protection provides a monthly benefit if he can no longer work for a specified period of time due to illness or injury. Generally covering 75% of his monthly income.
• TPD insurance pays a lump sum if he would became totally and permanently disabled.
Take note; these definitions may vary between life insurance companies, so it’s best to consult the relevant product disclosure statement (PDS).
While an income protection policy may help you and your family with day-to-day living expenses, TPD cover could assist with other expenses, for example, making modifications to your home to help your husband adapt to his new circumstances or pay outstanding medical bills.
However, as your husband is a business owner he might also want considers what will happen to his business should he become ill or injured for a long period of time. For example, who will pay the fixed costs of rent, electricity, salaries, accounting etc?
He might want to review business expenses insurance and/or keyman insurance.