Life Insurance and TPD
What is life insurance?
Life insurance, also known as term life insurance, provides a cash lump sum in the event of death. Some policies
pay on the diagnosis of a terminal illness. Cover normally applies immediately to any cause of death with the
exception of suicide occurring within the first 13 months. Premiums generally increase each year as you get
older.
What is total and permanent disability insurance (TPD)?
Total and permanent disability insurance (TPD) is usually an optional extra on a life insurance policy and
covers against a permanent disability. The amount of cover you can buy is usually limited to the amount of life
cover purchased. A claim is usually paid as a lump sum.
Why do I need life insurance and/or TPD insurance?
The choice of cover depends entirely on an individual's circumstances. Term life insurance is probably the most
economical form of protection for your family in the event of your death. TPD insurance covers serious and
permanent disablement but does not cover temporary disabilities or many traumas - these are best covered by income
protection and trauma policies. The number of cases of total and permanent disablement in comparison to other
conditions is small, so if you have a limited amount of dollars to spend on insurance you will need to weigh up
whether to spend it on this form of cover.
How much cover do I need?
Once you accumulate liabilities and have dependants, the need for insurance increases. On the other hand,
as you approach retirement you are more likely to have accumulated assets and paid off liabilities and children are
more likely to have left home, reducing the need for life or permanent disability insurance. Our Life Insurance Calculator is an illustrative tool which can help you to estimate
your current and future obligations and estimate your need for cover. Your insurance needs will vary over time and
should be reviewed at least annually.
Other Topics
Indexation of benefits
The initial sum insured may be eaten into by inflation as time passes. Most companies allow escalation of the
benefit in line with inflation or a set percentage increase without the need for further medical examinations or
paperwork.
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Compare premiums over the long term
What appears to be a cheap premium today may turn expensive if the insurance company you are with penalises
older age groups more than other companies. Using the Compare Quotes
Online feature of this site, you can graph the current premium structures over 5 years and compare the
competitiveness of the policy over the longer run. Some companies offer loyalty discounts, which can make the
overall cost over 5 or 10 years significantly less.
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Small premiums often equal small cover
Beware the so called "cheap" offers of insurance which often come through the mail. Remember the size of the
premium varies directly with the amount of cover taken out. Small premiums usually mean small amounts of cover eg
$50,000 to $100,000 which in the event of your death may be grossly inadequate to meet your family's needs. To
compare like amounts of cover from all the leading insurance companies use the Compare Quotes Online feature.
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Insurance from super funds
Your superannuation fund may include automatic cover for term life or disability insurance up to a certain
amount. There may also be a facility to "top-up" your cover for a nominated additional cost. Due to the "pooled" or
group nature of this form of insurance, the premium charged will generally favour the older members of the Fund or
those with pre-existing health problems who would normally be penalised by life insurance companies. Healthy,
younger members are in effect subsidising these groups and may find purchasing cover as an individual from an
insurance company to be more cost effective. Other issues to consider are the right of the Trustees of super funds
to override your choice of beneficiary and the lump sum tax which will apply to any payout where the beneficiary is
not a dependant (unlike for an insurance company payout).
Of course, if you are self employed or run your own Self Managed Super Fund (SMSF) you will need to ensure that
insurance is part of your business planning.
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Terminal Illness Benefit
Check the terminal illness section of your life insurance policy. Does the company offer early payment of part
of your benefit in the case of the diagnosis of a terminal illness? This could significantly improve your quality
of life and ease the burden of medical bills and other commitments on your family prior to your death.
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TPD "Own" versus "Any" occupation definition
TPD definitions do vary between companies but the differences between the two types of TPD cover can be broadly
described as follows:
Own Occupation - You will be paid if by reason of accident or injury you are unable to work ever again in your
own or normal occupation.
Any Occupation - You will be paid if by reason of accident or injury you are unable to work ever again in any
occupation for which you are reasonably suited by education, training or experience.
"Own" occupation definitions are generally preferable given that an injury such as loss of one hand may disable a
surgeon under such a definition, but under an "Any" occupation definition may leave him able to perform the duties
of a GP and therefore not qualify for the benefit. However the "Own" occupation definition is more expensive and
may not be available for all occupations. Some companies offer other "home duties" and "modified" definitions of
TPD.
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Usually only one TPD benefit payable
Usually only ONE TPD benefit is ever payable to an individual and payment of a claim for TPD may void your death
cover. After a payout you may become uninsurable and no longer able to obtain death, TPD, trauma or income
protection cover from any insurer. It is important to have sufficient cover to enable you to live out your
remaining life on the proceeds of the claim. Some insurers now offer a buyback option.
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