Why have Total and Permanent Disability (TPD) Insurance?

August 6th, 2012 by

TPD insuranceAlthough there is some overlap between trauma insurance and TPD, the claim that trauma coverage makes TPD unnecessary can easily be disproven, and the reasons why rest in the actual function of the TPD insurance policy.

It is important to bear in mind that anyone can find themselves permanently disabled due to illness or injury, and that disability can dramatically reduce the victim’s ability to live independently and care for themself.  Statistically, one Australian is diagnosed with a life-altering disability every 30 minutes. [i]

When asked for recommendations for purchasing a TPD insurance policy, the answers advisors give can vary. Some advisers recommend that TPD insurance policy benefits be enough to cover all debts and medical expenses. Others say it should cover the same amount as death or funeral insurance, while still others call for a TPD policy to be for as much as the policy holder can afford.

While it is widely accepted that TPD coverage is important in that it provides protection against some real potential risk to a large population of Australians, the questions begin to surface when the seemingly unlimited number of variations of TPD insurance policies are taken into consideration. Why are some illnesses and injuries covered while others are not, and how do providers determine what they will cover?  Most important, how aware are TPD insurance policy buyers of the gaps in coverage that exist, and how can they be better identified?

Insurance providers want to identify all areas of need when it comes to TPD insurance coverage, in order to improve customer confidence in the product. It also benefits providers to build a comprehensive base with unlimited flexibility that allows a TPD insurance policy to be tailored to the unique needs of each policy holder, both in personal scenarios and business scenarios.  For instance in personal situations, the total and permanent disability insurance policy takes into account the client’s current and future financial situation to address need if the insured becomes unable to work and earn an income. In business situations, the TPD policy takes into account the financial impact of the insured’s inability to work on the business.

Income protection insurance can provide needed cash to prevent a negative impact on the insured’s lifestyle and that of their family when the insured loses their income, paying out up to 75 percent of their earnings.

So why the need for TPD insurance? Because it protects the insured financially when expenses override the coverage of income protection and trauma insurance policies, making TPD insurance something that should be considered in addition to trauma and income protection policies.

Business need for TPD

When an individual is injured or becomes too ill to ever return to work, TPD insurance is the coverage that will pay out in a manner that addresses the permanence and totality of the insured’s medical problems.  Included in the business needs for TPD coverage are loan protection, business succession, and key person replacement.  Loan protection can be immediately identified, so the benefit amount recommendation can include all or part of a loan.  In the case of business succession and key person replacement, the financial impact is not readily known, so a logical formula can be devised to accommodate the impact.

When the insured discusses all the details thoroughly with a qualified insurance advisor, the range of potential impact can be distinguished and put in writing, leaving as little room for error as is possible when basing figures on future unknowns.

Personal need for TPD

From a personal standpoint, your total and permanent disability insurance policy should be set up in a way that provides for any financial impact that a major medical event would have on your family and your personal finances.  That includes recurring expenses – loan payments, utility bills, groceries, etc., and one-time or occasional expenses.

Where income protection insurance is in place, you should be able to count on it covering 75 percent of your expenses, so TPD insurance will cover the remainder.  And in fact, the remainder can be reduced if a provision is made to reduce or even eliminate the payments that can be included in part of your expenses, such as your mortgage payment, future school costs for your children, etc.

In the first part of the personal TPD insurance policy advisory, you may find a provision for a lump sum TPD payment to cover the leftover shortfall.

Since there is no way to know the severity of a future illness or injury, it is not possible to identify an accurate recommended benefit amount.  An alternative might be to purchase a TPD insurance policy for the maximum benefit amount available.  However, this could mean being over-insured, with high benefits that translate to high premium costs. Most financial advisors believe that since the potential need cannot be estimated in advance, their recommendations will be budget-based.

Disability support arrangements in all Australian states or territories are inadequate, despite the best efforts of disability workers, support services, and funding from all levels of government.  The system is geared to act in crisis situations rather than establish workable, long-term provisions for the disabled.  In August 2011, the Productivity Commission’s report  was released, with a unanimous recommendation to establish a National Disability Insurance Scheme (NDIS), with need-based funding determined by actuarial assessments, rather than the antiquated system if allocating from historic budgets.

The NDIS is designed to address the fact that disabilities are lifelong sentences, which require a lifelong approach to providing medical care and relevant support. Assessment will take into consideration the entire course of the disabled person’s life, not just their immediate needs. That includes home modifications for things like wheelchair ramps, handicapped bath furnishings – options that give disabled persons opportunities for greater independence and a more dignified existence.

Early intervention is another important component of NDIS, with better support services for disabled individuals and their families that places more control of their care decisions in their hands. By providing comprehensive information and referral services, the disabled would have better options for making informed decisions.

The NDIS will likely evolve over time and what is covered will be better known. By speaking with a personal insurance specialist you will gain a better understanding of your options and how the NDIS may come into play with TPD insurance.