Total and Permanent Disability Insurance
TPD insurance is a lump sum benefit paid if you become Totally and Permanently Disabled. You must be disabled to such an extent that you are unlikely to ever engage in:
- Your own occupation; or
- Any occupation; or
- Home duties (specifically for stay at home mums and dads).
The ‘Own Occupation’ definition is by far a more beneficial policy to be assessed under; however it is likely to be the most expensive. The ‘Any Occupation’ definition is much more restrictive in that it includes ‘any employment to which you are suited by education, training and/or experience’. As a rule of thumb ‘Own Occupation’ is around 50% more expensive than ‘any occupation’.
Careful consideration has to be made as to which cover you should have. Depending on your occupation we may recommend you to have more than one cover.
‘Linked’ cover is where one policy is connected to another. In the event of a payout of a linked policy, the sum insured in the other policy would be reduced by the payout amount. Some insurance policies allow the right to buy-back any reduction of sums insured. The prime advantage of 'linked' cover is that premiums are cheaper.
Is TPD insurance tax deductible?
TPD insurance can be deductible in Superannuation. Generally, 'Any Occupation' TPD premiums should be paid inside the Superannuation environment.
Before TPD insurance is taken out in Superannuation, it is paramount to ensure that if there were a payout, the recipient would be allowed access to these funds. A disability Superannuation benefit, is a benefit:
- That is paid to a person because he or she suffers from ill-health (whether physical or mental); and
- Where two legally qualified medical practitioners have certified that because of the ill-health, it is unlikely that the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.
A disability Superannuation benefit may be paid as either an income stream benefit and/or a lump sum benefit.
However, clients who have reached their preservation age that do not meet the permanent incapacity release condition can access benefits under the following conditions:
- Retirement (lump sum or pension from age 55);
- Age 65 (lump sum or pension);
- Transition to retirement (can commence at age 55 as a pension with a maximum 10% annual drawdown until retirement or age 65).
Further, if your Superannuation fund receives a TPD payout it is not taxable.
How much cover?
TPD insurance cover is more complicated to calculate than term life insurance because you are still alive so you are still incurring living costs, which could be quite expensive given your health may have substantially deteriorated.
TPD insurance cover should include:
- A repayment or reduction of your debts (credit cards, personal loans, home loans, investment loans etc)
- Assistance with medical costs, extra care and day-to-day expenses
- Provide a replacement income stream to supplement any income protection insurance payments (Income protection insurance will only ever be 75% of your pre tax wage)
- Education expenses for your children so they may finish secondary school/university
- An amount to enable you to take time off work to recover, or allow your spouse to take time off to assist you in your recovery.
The amount of TPD insurance cover required is reduced by:
- The envisaged earning capacity of your remaining spouse (please remember one’s ability to earn income might be dramatically reduced with an increased family workload). To enable the remaining spouse to maintain earning capacity, help can be hired.
- Existing savings, including Superannuation and/or investment income.
Superannuation disability benefits tax considerations
Superannuation disability benefits can be taken as a lump sum and/or a pension. The right option or combination of options depends on your personal circumstances.
- Life expectancy
- The availability of the future service period deduction (only claimed by Self Managed Superannuation Funds).
Chris Humphrey Private Wealth Management is conveniently located on the outskirts of Brisbane's CBD.
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