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Hewison Private Wealth - Insights
Hewison Insights

Income Protection Insurance and TPD – do you need both?

Marcus English
Adviser - Insurance
26 May 2022

One of the most common questions I get asked is, “Why do I need Total and Permanent Disablement (TPD) insurance when I have income protection, or vice versa?”

It’s a fair question – 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.

Let’s look at it in more detail.

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 70% 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 my earlier question – why do I need TPD insurance if I have income protection?

As you can imagine, the 70% of salary is vital to meeting your ongoing living expenses but it should be the absolute minimum or starting point. 70% of your current salary is unlikely to be sufficient if your condition became permanent.

In my opinion, 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 30% 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.

Important is that between the two insurance types you protect your position and long term financial goals. Each insurance type has its clear purpose and, when combined, will form a carefully constructed plan.

At Hewison Private Wealth 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 speak to me about ways to maximise your insurance coverage while minimising the premiums please connect HERE. Hewison Private Wealth is a fee for service independent financial planning firm – we don’t accept commission from providers and work only in your best interests. Sounds refreshing? It is.

Disclaimer: Any information, financial product or advice provided in this website is general in nature.  It does not take into account your needs, financial situation or objectives.  Past performance is not a reliable indicator of future performance. Before acting on the advice, you should consider whether it is appropriate to you in light of your needs, financial situation and objectives.