TPD vs Income Protection: Which One Should You Choose

Published: July 20, 2018

Not being able to return to work because of an accident or sickness could have devastating consequences. While sick leave and workers compensation might provide some relief, TPD cover and income protection insurance will generally alleviate most of the financial burden.

Both TPD and income protection can offer financial support if you suffer an illness or injury and are unable to work,. However, the main difference is in the way your benefit gets paid and the circumstances of your disability. TPD provides a once-off lump sum benefit when totally and permanently disabled, never to work again, versus income protection which pays a monthly benefit when you're unable to work for a specific period.

Choosing the right type of insurance could help you and your family continue the lifestyle you’ve grown accustomed to.

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What's the difference between TPD and income protection insurance?

Generally, income protection insurance will pay you a monthly benefit, for a predetermined period, when you are unable to work because of a sickness or accident. Total and permanent disablement (TPD) cover, provides a once-off lump sum benefit to help you pay for home modifications, medical expenses and outstanding debts when you are permanently incapable of ever working again.

Without TPD or income protection to support you when you’re unable to earn an income, you and your dependents are at risk of potentially losing your home, investments and retirement savings.

TPD vs Income protection insurance outside of superannuation

Criteria TPD Income Protection
How to purchase cover Usually as part of an optional extra on your life insurance policy. A stand-alone product separate from your life insurance coverage.
How claims are paid Once-off lump sum payment. Monthly benefit. Generally, for 2 or 5 years or up to your age 65 or 70.
What's covered Complete and permanent disability. Short term sickness or injury and permanent incapacity.
Benefits paid From $100,000 up to $2 million depending on your insurer. Generally, 75% of your regular income, up to $10,000 per month.
Waiting period Usually, 3 to 6 months. Can range from 14, 30, or 60 days, 3 or 6 months, 1 or 2 years.
Premium price Generally cheaper than income protection. Typically, more expensive than TPD because it covers more incidents.
Tax Premiums are not tax deductible. Lump sum benefit is generally tax-free. Premiums are tax deductible. The monthly benefit is usually taxed because it's seen as part of your regular income.

What is TPD insurance?

TPD is a type of insurance that pays a lump sum benefit if you are totally and permanently disabled due to a sickness or injury and unable to ever work again in your own or any occupation. This once-off payment can help you adapt to lifestyle changes, cover the cost of long-term care or medical expenses and assist with mortgage payments and other outstanding debts.

The advantages

  • Paying the cost of specialist care and alternative treatments.
  • To fund any adjustments, you need to make to your lifestyle.
  • Settle any debts, including medical bills.
  • You can enhance your policy by adding optional extras.

TPD cover options

  • Own occupation: The lump sum payment is made when you are permanently and totally disabled and unable to work in your specific occupation, in which you were engaged before the injury or illness.
  • Any Occupation: Provides cover when you are permanently incapable of working in any occupation suited to you by education, training or experience.
  • Home duties: Covers the homemaker or stay-at-home parent when they are totally and permanently disabled and no longer able to perform their regular domestic tasks, for example, cleaning and preparing meals.
  • Modified: Only pays a benefit if you are no longer capable of performing at least 2 of the 5 daily living activities. For example, bathing and eating.

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What is income protection insurance?

Income protection insurance helps you meet your month-to-month financial obligation when an illness or accident renders you unable to work. Generally, providing up to 75% of your monthly income for a specified period to cover your daily living expenses.

The advantages

  • Protect your ability to earn an income.
  • Covers both short-term and long-term incapacity.
  • Easier to claim because you do not need to prove permanent disability.
  • Your income stream remains uninterrupted even when you cannot work.

Income protection insurance types

  • Agreed value: Your monthly benefit is based on your income prior to application.
  • Indemnity value: Proof of income will be requested and confirmed at claim time.
  • Guaranteed Agreed value: Financial assessment takes place before the policy is accepted, and benefit payments may be guaranteed without needing financial proof.

Your monthly income and type of occupation will help you determine which income protection policy type is best suited to you.

Can you claim TPD and income protection at the same time?

Yes, you can generally claim and get paid for both TPD and income protection insurance when an illness or injury prevents you from working, and you've met the policy definitions of a claimable event, as stated in your product disclosure statement (PDS). However, this might differ from insurer to insurer depending on their underwriting guidelines.

Given the difference in how claims are paid for TPD vs income protection, you might want to consider taking out both policy types.

Take note; policy definitions are different for each insurance company, so shop around and use an independent broker to help you gather and compare quotes from Australia’s leading life insurance companies.

Combining income protection and TPD cover

It can take a long time for a medical expert to declare that you are unlikely ever to work again. TPD cover can thus take months or even years before it pays out because of the lengthy claims assessment process. This is where income protection can help fill the gap, by providing a monthly benefit to support you until you receive the TPD lump sum payment.

By combining TPD and income protection insurance, you are generally better protected and can potentially save on premiums when bought from the same insurance company. However, it's vital that you consider the right option for your particular circumstances and budget.

How to choose between income protection and TPD

If your current budget only allows for one persona insurance policy type, determine the following to help you decide:

  • How much cover can you afford, i.e. the premium you can consistently pay.
  • Assess your risk. Take a hard look at your lifestyle, health and family medical history.
  • Whether a lump sum or monthly benefit would be better suited to your circumstances.
  • How much money you have saved to help you while you wait for a benefit to be paid.
  • The amount of time you’re likely to require financial support.

Can you have TPD and Income protection inside super?

You can set up both TPD and income protection inside your super fund. However, specific benefits and features will not be available, and some restrictions will apply.

Total and permanent disability cover is now only available for Any occupation when purchased through your super. Specific income protection benefits are not available in your superannuation, for example, the rehabilitation benefit, premium waiver benefit and the accommodation benefit.

Also, you’ll have to meet all the conditions of release before a benefit will be paid, including:

  • The policy definition of a claimable event.
  • The rules of your trust deed.
  • The Superannuation Industry Supervision (SIS) legislation for a condition of release.

FAQs about insurance when you’re unable to work

Which option is best when self-employed and unable to return to work?

If you work for yourself or own a small business, you typically won’t have paid sick leave or workers compensation to fall back on should you become ill or injured.

However, you will generally be able to get income protection insurance and TPD cover. Which one is best suited to your circumstances depends on your type of occupation, how high a risk it is, and whether you would benefit most from a lump sum amount paid once off or a benefit paid every month for a predetermined period.

How do you qualify for disability?

A permanent and total disablement, as per the general TPD definition, is usually the result of losing sight in both eyes, losing the use of two limbs or loss of sight in one, as well as the use of one limb.

Can you work after a TPD payout?

Yes, you can generally return to work after a TPD payout without having to return the lump sum payment. However, it’s best to confirm this with your insurer as each company has different guidelines.

Can you claim tax on TPD and income protection?

If held outside your super fund, you can generally claim back part of your premiums for income protection, but not for TPD. On the other hand, the lump sum benefit of TPD is usually tax-free, while your monthly income protection benefit is typically taxed because it's seen as part of your regular income.

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