Life/TPD

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.

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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. The increase in the benefit each year is optional and can be refused.

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. Some companies offer discounts to new customers but after the first year or two these drop off and you can find yourself on a higher premium. Other companies offer loyalty discounts, which can make the overall cost over 5 or 10 years significantly less. Using the Compare Insurance 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.

Small premiums often equal small cover

Beware the so called “cheap” offers of insurance which are advertised heavily. 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 Insurance Quotes Online feature.

Insurance from super funds

Your superannuation fund may include automatic cover for term life or disability insurance up to a certain amount. This default level of cover may be inadequate for your needs and in some cases the amount will reduce as you get older. 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. The super fund may offer a facility to “top-up” your cover for an additional cost but this may require underwriting of your health. Other issues to consider are: potential delays in the payment of claims, 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.

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.

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 at a much reduced income 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.

Usually only one TPD benefit payable

Usually only ONE TPD benefit is ever payable to an individual and payment of a claim for TPD will usually void your death cover. After a payout you may become uninsurable and no longer able to obtain life insurance, TPD insurance, trauma insurance or income protection insurance insurance cover from any insurer. In this case it is important to have sufficient cover to enable you to live out your remaining life on the proceeds of the claim. Some insurers offer a TPD buyback option (this may be included at no cost or require an additional premium) which enables the death cover to be reinstated twelve months after the TPD claim.

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