Chapter 06 – Total and permanent disability (TPD) cover

TPD provides insurance cover in the event that a person becomes physically or mentally unable to earn a living from their work. The change needs to be a permanent one. 

TPD cover is often offered within the same policy as life cover. This is because, financially, becoming totally disabled often has the same effect as dying. For example, if you are a working parent with dependent children, and you become disabled and cannot work, then your family loses the income you were providing. 

What does total and permanent disability mean?

Different insurers use slightly different definitions. The definition used by AMP for their Elevate TPD insurance is as follows:

You are permanently incapacitated if AMP is reasonably satisfied that your ill-health (whether physical or mental) makes it unlikely that you will engage in gainful employment for which you are reasonably fitted by education, training or experience.

Own occupation versus any occupation

TPD insurance can insure against a person becoming unable to work either in their own occupation or in any occupation. As the names suggest, ‘own occupation’ means that you are disabled from pursuing your own occupation. For example if you are a plumber and you are paralysed and can no longer stand, then you could not pursue this occupation. But you might be able to engage in some other occupation, such as working in a call centre. The definition of own occupation used by AMP for their Elevate TPD insurance is as follows:

You are unable to follow your own occupation for a continuous period of three months because of an injury or sickness and in our opinion, based on medical or other evidence, because of that injury or sickness, you are unlikely ever to be able to follow your own occupation.

‘Any occupation’ is slightly different. Any occupation cover means that you cannot do any work that you are reasonably suited to by education or training. The definition of any occupation used by AMP for their Elevate TPD insurance is as follows:

You have been unable to follow your own occupation for a continuous period of three months solely because of an injury or sickness, and in our opinion, based on medical or other evidence, solely as a result of that injury or sickness, you are unlikely ever to be able to follow your occupation or any other occupation for which you are reasonably fitted by education, training or experience, which would pay remuneration at a rate greater than 25% of your ‘income’ during your last 12 months of work.

Any occupation has a slightly more demanding definition, although you can see that a person earning a large salary doing highly specialised work is not forced to undertake work that pays far less than they are receiving now.

Under-writing

The under-writing process for TPD insurance is similar to that for life cover. The insurer is assessing whether you are likely to become disabled in the future. This means they look at the same sort of risk factors (such as whether or not you enjoy skydiving) that they look at for life cover.

As with life cover, most insurers do not insure policy holders for situations in which the disability is caused by something that existed before the insurance was first taken out. For this reason, most insurers require that policy holders undertake medical tests and complete detailed questionnaires (as they do for life cover) before they provide TPD cover.

Similarly, most TPD policies exclude disabilities that are self-inflicted. Insurers are also reluctant to offer TPD policies where the insured person would be (financially) better off being disabled. Such a situation has an obvious potential for abuse. For this reason, most insurers check a person’s income before offering a TPD policy. If the income is low, the amount of TPD cover will be limited. This reduces the potential for a person to claim to be disabled simply so as to obtain their insurance payments.

Certain occupations are known to be associated with higher rates of injury. People in these occupations typically pay higher premiums for TPD. Exclusions may also be imposed. 

Who needs TPD cover?

Anyone who needs life cover also needs TPD, as the financial effects of becoming disabled are actually worse than the financial effects of dying. This basically means anyone with financial dependants. 

In addition, people who are themselves dependent on their continued good health to derive an income should also consider TPD. In many ways, the people who should consider TPD insurance are the same as those who should consider income protection cover

The Dover Group