Special Communique - TPD cover 101*
A total and permanent disability is life changing in every way, including making living your life much more expensive in terms of medical care and home modifications. This is why TPD cover is so valuable.
TPD insurance pays you a lump sum if an illness or injury leaves you totally and permanently disabled and unable to work or perform normal domestic duties if you work in a home-maker role.
It provides you with a pre-selected amount of money (your sum insured benefit) that you can use to pay out-of-pocket medical expenses, home and/or transport modifications, support your ongoing financial needs and take care of your dependants.
Quantifying how much cover you need is dependent upon your preferences for funding the various potential financial commitments detailed above.
When you are considering TPD cover; apart from the question of how much cover you want; there are three key things you need to understand to know exactly what you are covered for and what that means at claim time:
How your claim will be assessed? – “Any” or “own” occupation
How long your claim will take? – Maximum medical improvement
How your cover is structured? – Stand-alone or linked
1. “Any” or “own” occupation
When you start a TPD cover policy, you may be given a choice of definition that will apply at claim time. The two main choices are:
Own occupation – Where your claim is assessed against your ability to perform the specific requirements of the job you currently do, or
Any occupation – Where your claim is assessed against your ability to perform any job you are qualified or suited to based on your education, training or experience.
For example, imagine if you were a cabinet maker who permanently lost the use of one of your hands. Under an own occupation definition, you are likely to be considered totally and permanently disabled (TPD) because you will never be able to perform your current job again.
But under an any occupation definition, you may still be able to work for a building supply company, providing advice, or as a TAFE teacher, which means you may not be considered totally and permanently disabled.
With a greater likelihood of a claim being accepted, an own occupation definition typically adds to the cost of TPD, and it may not be available to all occupations.
2. Maximum medical improvement
TPD cover claims can take longer to pay than other types of life insurance, mainly because of the complexity involved in determining whether a disability is permanent.
Generally, a TPD claim will only be paid when you obtain “maximum medical improvement”.
That means you need to have exhausted all avenues of possible treatment. That is, you have had any operations, rehabilitation or medical procedures recommended by your treating doctors.
As you can imagine, a TPD cover claim can take months or even years to play out, and it does have a higher decline rate than other cover types because of the difficulty in proving permanency. For those reasons, TPD cover is often taken in conjunction with trauma cover – which can provide more immediate financial support for a defined list of serious medical conditions.
3. Linked covers
Linking policies reduces your premium, but there are major implications at claim time.
Say you have a $200,000 TPD cover policy linked to a $500,000 Death cover policy. If you make a successful claim on your TPD cover, your Death cover benefit will reduce by the $200,000 paid out (i.e. to $300,000).
Depending on your situation you may be eligible to buy back this extra Death cover at some point, but it is important to note that your Death cover is significantly reduced in the meantime.
Did you know?
Did you know that the Australian Prudential Regulation Authority’s (APRA) latest Life Insurance Claims and Disputes Statistics report for 1 January 2020 to 31 December 2020 confirms that clients who get advice on buying life insurance products are better off at claim time than people who do not get advice on their life insurance purchases.
Claims relating to clients who had the benefit of advice when buying their TPD cover were accepted 81 per cent of the time compared with just 67 per cent for those clients without advice.
APRA’s report states: “Generally, Individual Advised business shows higher admittance rates than Individual Non-Advised for the same cover type. This could be due to the policyholder having clearer expectations up front of what is covered by the product, or (related to the previous point) the adviser discouraging the policyholder from lodging a claim that is not covered by the policy.”
Want to know more?
If you would like to discuss any of the content in this article and how it may apply to you, please contact your AFRM adviser direct or email email@example.com.
* Please note, the information in this document has been prepared by Australian Financial Risk Management Pty Ltd (AFRM) ABN 21 001 696 868. AFRM hold an Australian Financial Services License (AFSL) 237186. The information is for general purposes only and has been prepared without taking account of your objectives, financial situation or needs. AFRM recommends that you seek professional advice before acting on any information contained within this document.