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I have been a financial planner since 2003 and provided personal insurance advice to hundreds of clients. Over the past 20 years I have worked with only two clients who claimed Total Permanent Disability (TPD) and received the payout. Regrettably, both clients passed away within a year of receiving the TPD payment. I mention this, not to shock you, but to highlight that, based on my experience, instances of TPD claims have been relatively rare.
Over the years policies and definitions have changed. Changes were made to some TPD definitions in 2016 because of ongoing running losses in the industry that some argued was due to broad TPD definitions on policies. Similarly, in 2019 APRA announced measures to address unsustainable sales of Income Protection (IP) products, including the redesign of IP products that were excessively generous.
In 2016, many industry fund insurers and some retail insurers retrospectively introduced ‘rehabilitation’ and ‘retraining’ clauses in their policies. These changes aimed to reduce claim payouts and encourage people to return to work. Whilst TPD claims haven’t significantly reduced since these changes, it is my opinion that it has become increasingly more difficult to meet the new terms that were introduced, particularly, for those holding TPD within industry funds.
What is TPD insurance?
Total Permanent Disability (TPD) insurance provides a lump sum payment if the life insured becomes permanently disabled and cannot return to work in their occupation or, in some cases, any occupation at all.
What medical conditions qualify for TPD?
TPD insurance claims cover a wide range of medical conditions that prevent an individual from working, including but not limited to:
- Mental health conditions such as depression, anxiety, and post-traumatic stress disorder (PTSD).
- Neurological conditions
- Cardiovascular diseases
- Cancer
- Heart disease
- Musculoskeletal disorders
- Physical injuries resulting from accidents such as:
– Spinal cord injuries
– Traumatic brain injuries
– Chronic pain conditions
The severity of the condition, whether physical or mental in nature, is crucial to making a successful TPD insurance claim.
Types of TPD
TPD insurance policies often fall into three main categories, but I like to break it up even further into four main categories given the changes that occurred with the definitions a few years back:
- Own occupation covers you if you’re unable to work in your current or most recent occupation.
- Any occupation provides coverage if you cannot work in any occupation for which you’re suited based on training, education or experience. I call this the 3-tier definition.
- Any occupation provides coverage if you cannot work in any occupation for which you’re suited based on training, education or experience and you could be requested to go to rehabilitation or do retraining. I call this the 5-tier definition.
- Daily Living provides cover if you are unable to perform everyday living tasks such as bathing, dressing, toileting, mobility and feeding.
For professionals, I would encourage them to consider holding an ‘own’ occupation definition TPD. This is especially true if you do not also have Income Protection, Life Insurance or Trauma cover. I am a big believer of having Income Protection first to cover loss of income as ‘cash is king’ and then Life insurance, especially if you still have a mortgage or a loved one that requires replacement income should you pass away. Even Trauma cover, whilst more costly, is arguably more likely to benefit you than holding TPD because Trauma policies cover more medical conditions and events that are more likely to occur than for TPD.
Most default cover within industry funds use the ‘any’ occupation 5-tier definition. Under these policies it can be more difficult to receive a payout, as the insurer will consider other work that you are suited for and may require you to participate in rehabilitation or retraining. I have seen first-hand a client who did not receive a payout under this definition. A mid-wife, who had a brain tumour removed and could no longer perform her duties did not receive a TPD payout from her industry fund because she had previously worked as a sales assistant. Her definition of TPD fell into the ‘any’ occupation category, meaning she was qualified to do ‘any’ or another type of work even if it was lower paying. She was also provided with rehabilitation after her operation and the industry fund insurer met their obligations under the terms of the policy. In short, since the midwife did not have an ‘own’ occupation TPD policy, which would increase her changes of receiving a payout, she was declined the payment.
If you are a professional or white-collar worker, you do not have an ‘Own’ occupation definition and you only have TPD within an industry fund, then you should consider reviewing your personal insurance. It would be a shame to pay thousands of dollars in premiums to then discover you were not entitled to a payout given you had an any occupation 5-tier definition TPD policy in place.
How your TPD cover is structured
You buy TPD insurance either as a ‘stand-alone’ cover, or as a ‘linked’ cover that’s connected to life cover or trauma cover – or both. Typically, linked cover will reduce your premium but may also impact your total cover.
For example, let’s say you have TPD cover of $200,000 and it’s linked to $500,000 life cover. When you make a successful claim on your TPD cover, your life cover benefit will reduce by the $200,000 paid out for TPD. That means your life cover is now reduced to $300,000.
You may be able to buy back extra life cover in the future. Buy-backs can be extra-cost options that must be in place before the claim event happens.
How long it takes to receive a payout
TPD claims can often take longer to process than other types of life insurance due to the complexity involved in determining whether a disability is permanent or not.
Most policies require at least three months off work because of the disability unless the disability is very clearly measurable, such as loss of limbs. Generally, you will only receive a payout when the insurer determines you have reached ‘maximum medical improvement’. This means that your condition is stable and further treatment is not expected to improve it. At this point you’ll have completed all operations, rehabilitation or medical procedures recommended by your treating doctors.
As a result, some TPD claims can take months (the average being around 7 months), or even years to resolve. Statistically, TPD claims have lower acceptance rates and longer average claim times than other types of insurance. TPD claim outcomes are influenced by the lengthy claims handling times and the difficulty in proving the permanency of a disability.
Many people have default TPD in their industry funds which may not meet their needs if they become total and permanently disabled. I would encourage everyone to review their TPD policies and consult an experienced financial planner to make sure the TPD they have is appropriate and rather than waiting until claim time and discovering you may not be entitled to a payout.
References
APRA (2019), “APRA intervenes to improve sustainability of individual disability income insurance”, viewed 11 Dec 2024 from https://www.apra.gov.au/news-and-publications/apra-intervenes-to-improve-sustainability-of-individual-disability-income
Australian Securities and Investments Commission (ASIC) 2019, Report REP 633 “Holes in the safety net: A review of TPD insurance claims”, October, ASIC, viewed 11 Dec 2024 from https://download.asic.gov.au/media/5311117/rep633-published-17-october-2019.pdf(opens in a new tab)
Australian Securities and Investments Commission (ASIC) 2021, Report REP 696 “TPD insurance: Progress made but gaps remain”, August 2021 from Report REP 696 TPD insurance: Progress made but gaps remain
Australian Securities and Investments Commission (ASIC) 2022, “ASIC review finds room for improvement remains with life insurance claims handling”, media release (22-241MR), 2 September, ASIC, viewed 19 April 2024 from https://asic.gov.au/about-asic/news-centre/find-a-media-release/2022-releases/22-241mr-asic-review-finds-room-for-improvement-remains-with-life-insurance-claims-handling/(opens in a new tab)
Insurance Watch, 2023, “Which are the best life insurance companies for paying claims?”, viewed 11 Dec 2024, from https://www.insurancewatch.com.au/insurance-claims-statistics.html
Lawyers Alliance 2016, “Changing Total and Permanent Disablement (TPD) Definitions”, 20th Sep 2016, Opinion, viewed 11 Dec 2024 from https://www.lawyersalliance.com.au/opinion/changing-total-and-permanent-disablement-tpd-definitions
Reynolds, A 2024, TPD claims advice Interviewed by Dina Porter, Kaplan Professional, Zoom, 9 February 2024
TPD Claims Advice n.d., “Tax on TPD claim payouts”, TPD Claims Advice, viewed 19 April 2024 from https://www.tpdclaimsadvice.com.au/tax-on-tpd-claims/
MetLife 2020, “TPD insurance inside and outside superannuation – Let’s talk tax and net benefits”, 18 June, MetLife, viewed 19 Nov 2024 from https://www.metlife.com.au/metlife-articles/insurance/TPD-insurance-inside-and-outside-superannuation/
Zurich 2024, https://www.zurich.com.au/latest-news/magazine/total-permanent-disability-insurance.html
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