Life Insurance and TPD Insurance
What is life insurance?
Life insurance, also known as term life insurance, provides a cash lump sum in the event of death. Most policies will also pay on the diagnosis of a terminal illness. Cover normally applies immediately for any cause of death with the exception of suicide occurring within the first 13 months. Premiums generally increase each year as you get older (i.e. are stepped), however level premiums are also available.
What is total and permanent disability insurance (TPD)?
Total and permanent disability insurance (TPD) is usually purchased as an optional extra on a life insurance policy and covers against a permanent disability arising from illness or injury which prevents you from ever working again. A claim is usually paid as a cash lump sum. The amount of cover is normally limited to the amount of life cover purchased, although additional standalone TPD cover can be purchased separately. The cost of TPD cover will be higher if you work in an occupation which requires manual work. Commonly claimed TPD conditions are back injuries and mental illnesses.
Why do I need life insurance and TPD insurance?
The purpose of life insurance is to protect your dependants from financial loss in the event of your death. The proceeds of the policy can be used to repay debts, pay for funeral costs, pay for future education costs and replace future income lost. Term life insurance is very economical cover, particularly if taken out while young and healthy.
TPD insurance protects both you and your family from financial loss in the event a serious and permanent disablement prevents you from working again. In this case your family has to continue to meet living expenses and debt obligations without your income and they may also have to pay for any costs associated with your disability such as medical fees, home modifications and ongoing care. TPD insurance will provide a lump sum which you and your family can use to repay debt and/or draw down on over time.
TPD insurance does not cover temporary disabilities or trauma conditions where you are able to eventually return to work – these are covered by income protection and trauma insurance policies. If you have an income protection policy with a benefit period to age 65 you may be able to have a lower amount of TPD insurance as 75% of your future income will be covered if you are permanently disabled. Your individual circumstances will determine which covers are a priority for you.
How much life insurance and TPD insurance cover do I need?
Your need for insurance will vary at different stages in your life. When you are taking out a mortgage or having children your family’s finances will be vulnerable to a loss of income due to unexpected illness or death. On the other hand, as you approach retirement you are more likely to have accumulated assets, including superannuation savings, and paid off liabilities and your children are more likely to have left home. This can mean that your need for life or permanent disability insurance is reduced.
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.
What is the maximum life insurance and TPD insurance cover I can have?
During the application process the insurance company will usually ask what other insurance covers you have. This includes policies with other insurers and also policies through your employer or super fund, including any automatic cover.
You can have multiple life and TPD policies – this is not a problem. The reason for this question is that your application will be assessed against certain maximum cover limits. While the major life insurance companies compared on this website have no absolute limit on the amount of life insurance cover an individual can apply for, there is usually a limit of $5M for total TPD cover (lower limits may apply on products marketed direct to the public).
The insurer will also consider whether your total amount of cover is reasonable relative to your level of income using an income multiple based on your age:
Indicative Maximum Life/TPD cover levels
Age Range Multiple of Income
Up to 40 20 to 25
41 to 50 15 to 20
51 to 65 5 to 15
If your insurance needs are higher than the amounts implied by these multiples this does not mean that your application will be refused. You may however be requested to provide more information about how you determined your cover amount. This may include details regarding your current level of debt, number of dependants and their age, your income and the income of your spouse (which may be affected by your death or disability if, for example, they are required to care for children).
If you do not have an income because you are not working or you are performing home duties you can still apply for life and TPD insurance, however cover limits may apply.
If you are not sure how much cover you need you can use our Life Insurance Calculator to estimate your requirements.