Welcome (back) to our Six Stones series. Our financial adviser, Jordan, is sharing as many tips, ideas and advice for people going through a divorce as a humble blog will allow. He’s staying away from specific financial advice – it’s all general advice over here, be sure to get personal financial advice before doing anything – but we hope you find some useful information in here as you navigate through/out of your divorce.
If Life Insurance is “the simple one”, then TPD is the “complicated” one.
Even amongst financial advisers, you’ll find wildly divergent approaches to this particular cover. Some think it’s not worth having because claiming on it is so difficult; others think it’s a must-have because the financial impact of disability is so great.
What makes it so complicated – and why is claiming on it so hard?
Well, it’s the nature of the product itself. TPD stands for Total and Permanent Disablement. It’s this combination of requirements – Total and Permanent – that creates this tension with TPD cover:
It’s quite unlikely you’ll claim on it – i.e., the likelihood of the event is relatively low;
But the impact of the event is incredibly severe.
Yet, you still need to meet the basic requirements of being Totally Disabled, and for that disability to be Permanent.
To try and make it feel a little more real, time for some (grossly simplified) examples.
1) Let’s imagine that you’ve been in a car accident and end up in hospital with severe injuries. So severe that you’re in traction for a few weeks and don’t fully recover for six months.
In this case, you’d be totally disabled for that six months. But because it’s temporary, you wouldn’t meet the ‘Permanent’ part of the definition – so you’d be unable to claim on your TPD insurance.
2) Or take a receptionist who was developed serious RSI in their left wrist. It’s slowed their average typing speed from 90 Words Per Minute to 50 WPM, and will never improve. In fact, it’ll likely get worse over time.
In this case, they are permanently disabled in that their capability has been permanently reduced.
But the disability is not ‘Total’ – they can still type and perform the other parts of their role, so a TPD claim would be problematic for them.
3) As a final example, take a lawyer who works for themselves and has, over the last few years, slowly begun to increase how much of their work they do from home to the point where over 80% of their work was virtual and via online meetings.
Following a specific and awful path of repeated trauma, they’ve developed debilitating agoraphobia and are unable to leave the house at all – even to check the letterbox.
Though this condition is total and possibly/likely permanent, would it be counted as a disability given they can still run their practice from home? This would be a difficult assessment for any insurer.
Though clearly simplified, I hope it’s clear that the assessment of these three factors:
makes the assessment of a claim for TPD Insurance quite complex.
Yet, considering the consequences of being Totally and Permanently Disabled, it’s a terribly important part of the picture.
How Much Do I Need?
Which highlights this specific question.
Again, the short answer is that you need enough to cover The Gap – no more, no less.
Quantifying that Gap is a key part of the process, and in doing so, I encourage people to imagine they could never, ever work again.
What debts they’d like paid out if they could no longer work anymore.
What initial medical costs should be provided for.
What kind of ongoing medical and care costs might be considered.
Would ongoing income be required if you couldn’t work anymore.
A sidenote here – for years, we’ve heard from breadwinners that the stay-at-home spouse doesn’t ‘need insurance’. Which seriously undervalues the work of the stay-at-home partner – work which would need to be done by the ‘breadwinner’ in that case, presumably…
Do school fees need to be covered?
The variability of these figures means that the answer really will differ for every single person.
Our How Much Insurance? Worksheet incorporates all of these calculations too.
When it Pays
We’ve covered a few of the considerations around when a policy will or won’t pay. The basic answer, though, is that it will pay when somebody meets the definition on the policy.
To give you an idea of what that occupation looks like, here’s one from an insurer we use (they’re all pretty similar to this):
at the end of the period of three months, after consideration of all the medical evidence and such other evidence as we may require, have become in our opinion incapacitated to such an extent as to render you unlikely ever to engage in any business, profession or occupation for which you are reasonably suited by education, training or experience…
Don’t you love a legalistic definition of a personal tragedy?
There’s a lot to unpack here, far more than a simple blog post could do. But some key terms are “in our opinion”, “unlikely ever”, “any”, “reasonably suited”.
(As usual, ASIC’s MoneySmart website has a wealth of baseline information about TPD Insurance if you’re looking for further info.)
This is the framework through which the insurer will assess your claim. If you meet these – and given the millions of dollars paid out each year, people do – then the insurer will pay you the money you need to deal with such a life-changing event.
When it Doesn’t
Then you have the times where it doesn’t pay out.
Similar to Life Insurance, if the disability has happened because of something you deliberately did to yourself, the insurer probably won’t pay you a benefit.
Or if it’s happened during the commission of a crime, act of war or insurrection.
Of course, if the individual terms of your policy exclude whatever it is that caused your disability, then it won’t pay out.
For example, if you had a ‘back exclusion’ which meant your spine wasn’t covered, but it then deteriorated and left you wheelchair-bound, you wouldn’t receive any benefit.
And if you didn’t disclose something of relevance to the insurer during your application, they may have the right to terminate or ‘avoid’ your policy altogether – one of the worst possible outcomes.
As a final note – if you don’t meet the exact definition of a ‘total and permanent disability’ in some way, then that will also mean you won’t be paid a benefit under the policy.
For instance, our three examples above – the car accident victim, receptionist and agoraphobic lawyer – would be unlikely to get paid under their TPD insurance, based on the limited information provided.
This doesn’t prevent them from accessing any of their other insurances, of course – same as ‘not dying’ means you can’t claim on your Life Insurance, but can still claim on your Income Protection.
Things to Look Out For
1) The ‘Disability Definition’.
There are, in your usual retail policy, 4 different ways to define a ‘disability’. The two we most often see are the ‘Any Occupation’ and the ‘Own Occupation’.
An ‘Own Occupation’ policy is seen as more generous and is more expensive as a result.
This pays if you’re unlikely to ever be able to work in your specific occupation again.
The classic example is a surgeon who loses the use of their left-hand. They’ll never be able to operate again, so would be considered disabled under an ‘Own Occupation’ policy.
Whereas an ‘Any Occupation’ definition says you’re disabled if you’re unlikely to ever be able to work in any occupation you are reasonably suited to by education, training or experience.
To continue using our poor surgeon – an insurer could argue that even though they can’t operate, they can still practice in other areas of medicine and may not be considered ‘totally’ disabled.
For most people it’s a distinction without a difference, yet for the small set of people who would qualify under an Own Occupation, but not meet the Any Occupation definition, it’s of critical importance.
2) Super Ownership
As with Life Insurance, you can hold your TPD insurance through your super fund.
This is a great way to obtain cover you might not be able to afford if you had to pay it directly – and potentially pick up a handy 15% tax credit off the premium too.
But there are serious consequences to think about before you do this (definitely seek personal financial advice around this).
For instance, you can end up paying up to 22% tax on the benefit paid to you. For a $1 million benefit, that’s up to $220,000 in tax payable.
Accessing the benefit has its own complications too, as does the limited definitions available in superannuation.
As with most things, there are pros and cons to be considered here.
3) Waiting Periods
Now we’re getting into the arcane parts of the policy.
Some policy’s allow for a three-month waiting or qualifying period before the insurer will consider you disabled. Given the delays involved in the process, this isn’t often a big problem.
But others set a six-month waiting period, which can be difficult for a household without any money coming in for half a year.
4) Linked Policies
Often, your Life and TPD insurance will be ‘linked’ together. This helps keep the price down while broadening out your coverage.
But there are a few traps here too. You want to confirm how the link is structured.
In some cases, $500,000 of Life and TPD cover means that you have one Life policy with $500,000 of cover and another policy of $500,000 TPD.
But, more commonly, it’s a combined benefit.
So, if you were to claim on the $500,000 TPD cover and be paid, that would leave you with $0 on the Life Insurance side.
This isn’t a bad thing, per se, but it is a thing to be aware of. This issue can be avoided via things like ‘Life Buyback’, but that’s too far into the weeds for this post – find an adviser you can talk to and pick their brain on that one (most of us can talk about this stuff underwater!).
5) Your Occupation
As you can probably tell, TPD is an ‘occupational’ based insurance – it requires an assessment of your ability to work to meet its definition of ‘disabled’.
Naturally, this means what you do for a living is a critical part of the puzzle. It is VITAL that your policy is covering you for the right occupation.
If only because ‘riskier’ occupations cost a damned sight more than the ‘lower risk’ ones.
For instance, say you were an unusually responsible 19 year old and took out $500,000 of TPD insurance when you were working as a concreter.
Because of the risks involved in that line of work, you’re paying, say, 1.8 times the standard premium – let’s say you’re paying $1,800 a year for that cover.
5 years in, you grow tired of the early starts and wet feet and decide to move to an office job. From an insurance perspective, you’re now a lower risk proposition.
But the insurer won’t know that unless you tell them.
So they’ll keep charging you 1.8x the standard rate because as far as they know, you’re still concreting.
However, if you were to tell them about your change in career, they can reduce your overall level of risk and bring the premium back down to the standard rate – for argument’s sake.
Interestingly – and this is perhaps the closest thing to a free breakfast in insurance – that doesn’t go the other way.
An insurer, under a proper, guaranteed renewable policy, cannot increase your level of risk if you change careers, provided you maintain the same policy.
Which means that for anybody going from office job to concreting – for example – they’ll be paying below-risk rates for as long as they have the same policy.
TPD Insurance is a complex beast and, as much as I fancy my skills as a blog writer, I have barely scratched the surface of things you should consider when making this important decision.
So do some more research – the ASIC site is a great place to start, as are some of the big insurer websites. Then, if you have more questions, find a licensed, professional financial adviser you feel comfortable with.
I’ll call this post here – some 2,000 words in! – and say that our next post is all about the happy topic of Trauma Insurance…!