Understanding your TPD, Life, and Income Protection Payment – Is it Enough?

What is TPD, Life and Income Protection Insurance?

Being properly insured can help relieve stress and prevent financial difficulty if something were to happen to you. That’s why there are a number of different insurances that can help protect your family’s livelihood if the worst were to happen, including:

• TPD (Total and Permanently Disability) –  a lump sum insurance benefit that is paid to you if you suffer a serious illness or injury.  
• Life insurance, also known as death cover – is a lump sum to be paid out to your beneficiaries in the event of your death.
• Income protection insurance – a monthly benefit that pays part of your lost income if you’re unable to work because of a disability caused by illness or injury

Getting insurance advice from a financial advisor should leave you feeling confident you have the right cover to protect yourself and your family. As the type and level of coverage, you need change throughout life, if your financial advisor arranges your insurance, it’s reasonable to expect them to ensure your coverage is enough to match your current lifestyle and expenses. Unfortunately, many Australians only find out they are underinsured when it’s too late – when they make a claim.

How do Financial Advisors Calculate your Insurance Needs?

There are a number of methods that financial advisors can use to calculate how much insurance is right for you. These include:

The Rule-of-Thumb approach

This approach focuses on how much insurance coverage a family needs to replace the breadwinner’s earnings while maintaining their standard of living. While this approach can provide a basic estimate of the insurance need, it does not take into account individual circumstances, such as the insured person’s age, the age of their dependents, or the total income of the household.

Income Replacement Approach

This approach states that the economic value of a life is the present value of the future earnings potential of that person. The amount of insurance needed is equal to how much the insured person will earn until retirement.

Needs Approach

The needs approach is a simple formula that is used to calculate an individual’s life insurance need based on several calculations:

• Sum all of the individual’s short-term needs from their final expenses (funeral, attorney), outstanding debts (credit cards, car loan), and emergency expenses (medical, home repairs).
• Sum of all of the individual’s long-term debts and obligations, such as mortgage repayments using the future value of money equation.
• Sum of the family’s living expenses, including food, utility bills, and transportation, using the future value of money equation.
• Sum of all resources an individual has to meet their needs, including all available savings, stocks, bonds, and existing life insurance policies.

The remaining amount when resources are subtracted from income needs is the amount of life insurance an individual should consider.

An experienced financial advisor can guide you through the process of deciding how much insurance and what type of policy you want, basing those calculations on family needs, using one of the above methods.

How Should Your Financial Advisor Present Your Insurance Analysis?

Your financial advisor should provide their Life, Income Protection, Trauma, and TPD insurance recommendations in a Statement of Advice.  This is a document that explains the insurance you currently have, any recommendations they suggest (including the type and amount), and an explanation of why the advice provided is in your “best interests”.  

The Statement of Advice should also acknowledge any health or personal circumstances that you face that have influenced your recommendation. For instance, if you have an existing health condition that may be excluded under a new insurance policy, then the advisor should state how the benefits of transferring to a new insurer outweigh retaining your existing one.

Mistakes Made By Financial Advisors

Sometimes financial advisors make mistakes in calculating the amount of insurance you require or the type of insurance most suitable to you. Such mistakes can include:

1. Failing to advise a client to take out TPD insurance;
2. Failing to recommend that a client take out TPD insurance in combination with Income Protection Insurance;
3. Failing to identify pre-existing injuries or failing to advise clients as to certain exclusions on TPD or Income Protection Insurance;
4. Failing to advise clients as to their ability to claim additional TPD insurance upon the occurrence of certain ‘life events;
5. Failing to advise a client to take out adequate TPD insurance;
6. Failing to implement Life, TPD, Trauma and/or Income Protection insurance recommendations.
7. Failing to take out Agreed Value income protection insurance.

Getting Legal Help For Your TPD Claim

If you want to make a TPD claim or have recently had your claim rejected, reach out to our expert legal team. We are committed to ensuring our clients receive the best possible advice and guidance on their situation, especially in matters as serious as Total and Permanent Disability. You can contact us online, call us at 1300 433 533 or email us at enquiry@fdlegal.com.au.

FAQs

How Much Is A Typical TPD Payout From A Superannuation Fund?

TPD payout amounts typically range between $60,000 – $500,000. The amount you can claim is called your “insured benefit amount”, and it will be clearly identified on your superannuation member statement.

However, your total TPD payout amount could be a lot higher if you have multiple policies. Many Australians have multiple superannuation funds because they’ve changed jobs over the years. You can receive an insurance benefit from each policy you hold.

How Long Does It Take To Claim TPD?

It generally takes around 6-12 months for a TPD lump sum payout to be finalised, but this depends on the complexity of the claim. Insurance companies typically complete their assessments of non-complex TPD claims within six months, after which it is handed over to the trustee of the superannuation fund who will then complete their own assessment. This usually takes one to two months.

Can You Claim More Than One TPD Payout?

Yes! You can make one TPD claim for each TPD policy you hold. This is quite common, as many people have multiple superannuation funds as a result of changing jobs over the years, and may have a TPD policy through each fund. Making a successful TPD insurance claim against one policy has no effect on any other TPD insurance you may have, but you’ll need to submit a separate claim against each policy.

How Hard Is It To Claim TPD Insurance?

Claiming TPD insurance can be both time-consuming and frustrating. It takes roughly 6-12 months for a TPD claim to be finalised, but making even one mistake during the claims process can cause delays or jeopardise your claim. For this reason, many people choose to hire a lawyer to manage their TPD claims.

Is TPD Considered Taxable Income?

A TPD payout is not considered taxable income, however, if you withdraw part or all of your TPD payout amount from your super fund as a lump sum, you’ll need to pay “superannuation lump sum withdrawal tax”. The calculation is different for everyone, and if you have multiple super funds, the calculation will be different for each fund you make a withdrawal from.

How Much Tax Do I Pay On A TPD Claim?

You will pay tax when you withdraw your super or TPD insurance payout if you are under the preservation age (55 or 60, depending on your birth date). The superannuation fund will perform a “tax-free uplift” calculation, meaning a portion of your withdrawal will be tax-free. This means everyone will have a different effective tax rate which could be anywhere between 1% and 18%. If you have more than one super account you will have a different tax rate on each one.

Why Do TPD Claims Get Denied?

Insurers usually deny a TPD claim for one of the following reasons:

• The insurer does not believe you satisfy the definition of TPD
• The insurer has obtained medical evidence that states you do not have an injury or illness
• Your claim was lodged too late
• You were above the age of 65 at the time of your injury or illness
• The insurer finds that you can work in some form of employment
• You have not met the working requirements prior to the date of injury (such as working 30 hours per week prior to injury or illness)

What To Do If Your TPD Claim Was Denied

If your TPD claim was rejected by your insurer, you may want to consider consulting a lawyer to discuss the possibility of overturning their decision. Insurers avoid paying benefits whenever possible and rely on you not challenging their decision.

A lawyer may be able to:

1. Request an internal review by the superfund’s internal dispute resolution team
2. Refer the decision to the Australian Financial Complaints Authority (AFCA)
3. Commence your claim in Court to be determined by a judge

If your TPD claim has been denied and you want to know if you can challenge the insurer’s decision you should contact FD Legal for a free case assessment.

How Can FDLegal Help with TPD Claims & Insurance Disputes?

To increase the likelihood of getting a successful result and having a less-stressful experience, many people elect to have a lawyer manage their TPD claim. FDLegal has submitted hundreds of TPD claims on behalf of clients, and we are intimately familiar with what the process requires to get your claim approved.

We consider all aspects of your case to give you the highest likelihood of success, including:

• What cover do you have
• If you have multiple superannuation funds
• Time limits for TPD claims
• Minimum wait periods
• Whether you meet work history requirements
• Your age
• Your evidence and whether it’s good enough
• Any exclusions or eligibility clauses in your TPD insurance policy