The average individual has car insurance, health insurance, home insurance, and other common insurance types to provide them with funds when the unexpected happens to their health, home, or car. But what if you get injured at work, get involved in an accident, or have a terminal illness and are unable to work?
Income protection insurance is an insurance type that can provide you with a benefit if you get sick or injured and are unable to work. This cover is designed to replace a portion of your earnings, helping you afford basic needs or daily living bills and expenses.
But how does income protection insurance work, and why is it important, especially when compared to total permanent disability insurance (TPD)? Keep reading to find out.
The Key Differences Between TPD and Income Protection
The main difference between TPD and income protection insurance is their coverage.
Both insurance options pay you if you’re unable to work due to health reasons, but TPD insurance pays a lump sum (one-off payment) if you become totally and permanently disabled, resulting in you being unable to ever work again.
Conversely, income protection insurance offers ongoing payments representing a portion of your regular income if you’re unable to work due to injury or illness.
TPD and Income Protection complement one another to help ensure that you are adequately covered.
In today’s market, income protection policies will generally replace up to between 60% and 80% of your income should you be unable to work and they will continue for the duration of your benefit period (anywhere from 12 months all the way through to age 65).
The monthly payments you receive from income protection will likely be taxed just as your regular income is.
| TPD | Income Protection | |
| Payment Structure & Cost | Premiums can generally be paid monthly or annually. The types of TPD insurance that can be owned by a super fund are Any Occupation or Home Duties/Non-Working TPD Insurance. The most comprehensive definition of TPD, Own Occupation, cannot be owned by a super fund. | Premiums can generally be paid monthly or annually. You can typically own income protection in your own name or through a super fund. |
| Duration of Coverage | 2 to 5 years or until the age of 65 | 2 to 5 years or until the age of 65 |
| Benefit Amount | Between $30,000 and $500,000 | Up to 75% of your monthly income |
| Benefit Duration | The TPD benefit period usually changes at age 65 | The income protection benefit period is 2 to 5 years or up to age 65 |
| Usage Restrictions | Insurance does not cover injuries or illnesses that don’t result in a total or permanent disability | Insurance doesn’t cover employment termination |
| Tax Implications | Benefits paid through super are typically subject to an element of taxation that is calculated at the time of payout. | Benefits you receive are typically treated as taxable income. |
| Eligibility | All policies vary however the most common form of TPD Insurance, Any Occupation, generally requires you to unable to ever be able to return to work in any occupation you are suited to by way of education, training, experience or reasonable retraining. | Definitions vary significantly between products however there is typically no requirement for your illness or injury to be permanent, income protection is designed to provide a benefit should you be unable to work temporarily due to illness or injury. |
| Waiting Period | Usually between 3 to 6 months waiting period | Usually between 14 days and 2 years |
| Premiums | Determined by age, gender, occupation, health status, disablement definition, premium type, and benefit amount | Determined by age, gender, occupation, monthly benefit, waiting period, benefit period, premium type, and health condition |
| Cancellations & Renewals | Retail advised policies through a financial adviser such as ourselves are ‘guaranteed renewable’ which means that the insurer is obliged to renew your policy so long as you pay the premium. You are able to cancel your cover at any time. | Retail advised policies through a financial adviser such as ourselves are ‘guaranteed renewable’ which means that the insurer is obliged to renew your policy so long as you pay the premium. You are able to cancel your cover at any time. |
Factors to Consider When Deciding Which Option Is Right for You
As stated earlier, TPD insurance and income protection insurance offer different coverage options.
So, when deciding the better option between an income protection cover and TPD insurance, consider the significant factors below.
- Medical history and current health status: The current state of your health is a major detail that can affect your eligibility for coverage and the premiums you’ll need to pay. So, understand what your current health reality is and other pre-existing medical conditions that can affect your insurance.
- Age and life stage: Understanding your life stage is crucial to determining your long term insurance needs as it is important to model this out to ensure you are adequately covered. The insurance needs of someone approaching retirement are vastly different to that of someone purchasing their first family home and these differences greatly impact the types and amounts of insurances you will need.
- Occupation and income: The job you do and your income level are other considerations for your insurance needs. Someone with a high-income job or people working in high-risk industries can combine TPD and income protection insurance options to get adequate protection in case the unexpected happens.
- Level of debt or financial obligations: How much you owe and your personal circumstances, including your financial obligations, can influence the amount of coverage you need. Some of the more significant costs that these insurances address include mortgage payments, dependent care, and other recurring financial obligations. However, it is crucial to consider your families needs as well, whether it be education costs or help at home too.
- Savings and financial resources: When determining how much and what types of cover you need, it is important to consider your existing assets and resources. Depending on the purpose of these assets, you may seek to use them to ‘self-insure’ for a portion of your insurance needs.
The Main Overlap Between Both Insurances
The main commonality between TPD and Income Protection Insurance is that their benefits are related to you being unable to work due to illness or injury.
Income Protection is simpler to claim on as it does not require your inability to work to be permanent which removes a significant barrier to claiming.
What is TPD Insurance?
TPD insurance is a disability cover that offers a beneficiary a lump sum payment if they become completely and permanently disabled and unable to work at a current or potential job or unable to return to normal domestic duties.
Usually, the insurance company pays a TPD cover if a permanent disability has prevented a beneficiary from working for 3 to 6 months.
The permanent disability may be a result of an accident or illness, and the lump sum is a one-off payment that can cover medical bills, and debts, or offer ongoing income protection entitlement to the beneficiary or their family.
What is Income Protection?
Income protection insurance is a product that provides a monthly benefit in the event of you being unable to work due to illness or injury.
Usually, the income protection insurance cover reimburses the individual with up to 70% of their monthly income before their illness.
So, income protection insurance is ideal for people who rely on their income to provide for themselves and their loved ones.
As opposed to TPD insurance, instead of a one-time lump sum payment, you get a regular payment to replace a portion of your income until you can return to work, end the policy term, or can no longer meet the insurance eligibility criteria as per the Product Disclosure Statement (PDS).
Should You Get Both TPD Insurance and Income Protection?
If you have TPD and income protection insurance, you can generally claim on both, as one doesn’t affect the other.
This is not the case for some products that are provided by super funds however it is the case with the products we advise on.
In the event of you being unable to ever return to work, it is crucial to consider that income protection will only replace a portion of your income.
For the vast majority of Australians, simply replacing a portion of their income for a fixed period of time (up to age 65/70), is not enough.
Given you will still have your regular expenses such as your mortgage or rent, you may require significant care which can be a large added expense that you previously did not have.
Why TPD Insurance is NOT a Substitute for Income Protection
TPD insurance and income protection insurance look similar because they cater to people who need financial support due to their inability to work as a result of health issues.
However, both insurance products are not the same.
TPD cover offers a lump sum payment to you on a fixed condition that you experience total and permanent disability.
Conversely, income protection insurance pays an ongoing sum of money to beneficiaries who are unable to work due to illness or an accident. In other words, you don’t need to be disabled to claim income protection.
The degree of disability required to claim on a TPD policy is generally more cumbersome than an income protection policy as it requires you to be unlikely to ever return to work again.
Should your illness or injury only render you unlikely to work for a period of 2 years, a TPD policy is unlikely to provide you with a benefit as it is not permanent.
If you are reliant on your income and your income will cease or reduce should you be unable to work, it is crucial to consider income protection insurance.
Want Help Finding the Best Option for Your Circumstances?
Income protection and TPD are insurance covers that offer financial support to beneficiaries who have suffered an illness or injury – whether as a lump sum benefit or a consistent monthly benefit. However, the intricacies of finding which option best suits your preferences and appetite require seeking professional help to avoid errors.
At Curo Financial Services, we are happy to support you and provide al the information you need to get the perfect insurance cover. Our expert team is also readily available to answer any questions you have.
Click here to talk to an expert!
Frequently asked questions
Can I have TPD and income protection inside my super?
Yes, you can own TPD and income protection inside superannuation. Super funds will often offer this cover to their members. There are more robust TPD product such as an Own Occupation TPD which cannot be owned through super. Income protection is typically worsened when held through super as claim payments are subject to Superannuation legislation.
Which option is best if I’m self-employed and unable to return to work?
Self employed people need to consider both income protection and TPD insurance. It is crucial to seek advice regarding this as these types of insurances can become more complex when you are self employed and it is vital to establish your cover correctly to prevent any surprises at claim time.
Do I get tax benefits from TPD insurance or income protection?
Income protection premiums, when paid personally, are typically tax deductible. The entire premium may not be deductible and you should consult a financial adviser to discuss this further. Income protection benefits are generally treated as assessable income when you lodge your tax return and therefore tax will need to be paid on the money you have received. When TPD insurance is held through super, there may be tax payable on the benefits you receive.
General Advice Disclaimer: The advice provided is general advice only and in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.
