One of the common questions I get asked is, ‘Why do I need Total and Permanent Disablement (TPD) insurance when I have income protection, or vice versa’.
After all there are similarities between the two and they can overlap or double up if not structured effectively.
However, in practice, they should supplement and complement each other.
Each do pay a benefit in the event of total disability but there are some significant differences.
Income protection is typically an ongoing monthly payment if you’re unable to work for a period, whereas TPD is a lump sum payment. And whilst TPD covers disablement, you’ll notice the distinction of it being permanent, whereas income protection doesn’t necessarily require your disablement to be permanent. You may be totally disabled for a period of one year and then return to work, at which time income protection payments would cease.
In this scenario you’d have benefited from income protection but not TPD. Statistically, over your career, you’re more likely to claim on income protection than TPD.
So what is the purpose of each and how should you structure your arrangements effectively?
Income protection is designed to maintain your lifestyle (to some extent) should you lose the ability to work for an extended period of time due to ongoing illness or injury. At best you’re getting three quarters of your income – so you’d be in a worse position compared to going to work (there needs to be an incentive to return to work)! But the benefit of that 75% of salary is vital. Loss of family income has dire consequences and can lead to the loss of a family home. Receiving those income protection benefits will make a huge difference to the support of your family and your future lifestyle.
This leads back to that earlier question we often get – why do I need TPD insurance if I have income protection?
As you can imagine, the 75% of salary is vital to meeting your ongoing living expenses but it should be the absolute minimum or starting point. 75% of your current salary is unlikely to be sufficient if your condition became permanent.
However, TPD (for those working and earning an income) should be seen as a means of supplementing your income protection.
When structuring your wealth protection arrangements you need to consider, in the event of permanent disablement, what level of funding is required on top of the income protection payments?
A good starting point is to have provisions to eliminate any debt you might have, just to relieve the financial pressure.
Also consider the 25% of income that isn’t insured.
What is the present value of that income over the remainder of your working life, allowing for some growth?
What is the impact of no more superannuation contributions going towards your retirement?
Your required level of cover is likely to be higher initially but reduce as the years tick over and you accumulate wealth.
Another factor not often considered is the increased cost of living with a permanent disability.
Expenses that didn’t exist in the past. It might be hard to put a number to that but it needs to be considered.
The most important consideration is that you protect your position and long term financial goals by using these two types of insurance products. Each insurance type has its clear purpose and, when combined, will form a carefully constructed plan.
Here at CeebeksTM Business Solutions for GOOD we form insurance strategies that are carefully designed, not to over insure or double up on benefits, but simply to avoid the financial stress of unseen events.
If you’d like to have a chat about ways to maximise your insurance coverage while minimising the premiums you can call us on (03) 5561 2643, email solutions@ceebeks.com or pop into 25 Banyan Street, Warrnambool.
