TPD insurance through super: A definitive guide

While everyone’s finances are feeling the pinch at the moment, just imagine for a moment what would happen if an illness or disabling injury meant you couldn’t ever work again. 

For most of us, the financial picture would be pretty bleak.

It’s just that scenario the total and permanent disability (TPD) cover available through your super fund is designed to address.

Often referred to as disability insurance, TPD cover protects you if you are unable to work, giving you an income or a lump sum to draw on if something happens and you are no longer employable.

What is TPD insurance?

Total and permanent disability (TPD) cover is an insurance policy that pays a lump sum or income stream if you become permanently disabled due to an accident or illness and are unable to work again. It can provide a valuable source of financial security for you and your family, as well as helping to pay for your medical and rehabilitation costs.

In the past, many super members held default TPD cover through their fund, but government changes (see ‘Protecting your super reforms’ below) and members choosing to opt-out have now reduced the number of members with this type of protection. According to SuperRatings research, in June 2023 only 45.7% of members held life and TPD insurance through their fund, leaving the majority of fund members without this protection.

Unfortunately, different insurers have different definitions of what it means to be totally and permanently disabled (TPD), with some offering cover if you are TPD for your Own Occupation and some only covering you if you become TPD for Any Occupation.

You receive a payout with:

• Any Occupation if you become permanently disabled and are unlikely to ever work again in your own occupation or any other occupation to which you are suited by education, training or experience. According to ASIC this type of cover is cheaper but has a higher threshold to reach for a successful claim, so it’s less likely to pay out a claim made against the policy.
• Own Occupation if you become permanently disabled and are unlikely to work again in any capacity in your own occupation. Because the terms are quite specific and a payout is more likely, this is the most expensive form of TPD insurance.

How does TPD cover work?

If you meet the definition of total and permanent disablement in the policy, your cover provides you with a payment designed to help with your medical and rehabilitation treatments and the necessary financial support to replace your previous salary or wage.

Many super funds offer TPD cover that pays a lump sum of up to $3 million (some retail funds go to $5 million). In most cases, however, default group super TPD cover pays out less than this amount.

Generally, TPD cover is automatic once you reach age 25 as part of your default insurance (unless you choose to opt out) and it’s debited directly from your super account. Following government reforms in 2019, fund members aged 16 to 24 are not automatically covered and need to apply for cover.

To qualify for default TPD cover through your super you are not required to provide medical or health information. Most default TPD policies will not cover you for any pre-existing medical conditions.

If you decide to apply for a higher level of TPD cover you may need to provide medical or health information, particularly if you apply for cover over $1 million.

What does my TPD cover cost?

Your annual premium for TPD cover depends on risk factors like your gender, age and occupation. If you work in a job the fund’s insurer deems risky or hazardous, you will probably have a higher premium than someone working in an office environment. Also, TPD cover inside super generally becomes more expensive as you get older.

TPD cover is often available as either unit-based or fixed cover. With unit-based policies your cover decreases as you age, but the premium stays the same. With fixed cover, your amount of cover stays constant, but the premium you pay increases with age. The PDS insurance documents on your super fund’s website will provide detailed pricing information on your insurance cover and you should check these for more details.

It’s worth remembering in most cases the default TPD cover offered by super funds is cheaper than if you buy it directly from an insurer outside super.

How much TPD cover do I need?

The amount of TPD cover you require depends on the expenses you would face if you were unable to work again. These could include your normal living expenses, medical costs and repaying debts such as your mortgage.

If you have a partner and dependents, or suffer a disabling injury requiring constant care and/or modifications to your home, you could find you need significant financial resources to pay for your ongoing expenses.

You also need to consider whether you have any private health insurance that could help pay your medical and rehabilitation costs, or if you would be eligible for any social security or workers’ compensation payments. Also consider any income protection (IP) insurance you hold (either inside or outside super) and whether your family would be able to assist you financially.

If you are uncertain whether you are adequately covered by your default insurance, it’s a good idea to talk to your super fund or an independent financial adviser about your TPD insurance needs.

What you need to know about claims and waiting periods

With a TPD policy, you generally receive a payout as either a lump sum or an income stream.

Most policies have a waiting period before a payment is made, with common waiting periods being either three months or six months continuous absence from work.

Some illnesses and injuries do not require a waiting period. Most funds have no waiting period if you suffer a heart attack, major head trauma, motor neurone disease, multiple sclerosis, dementia, Parkinson’s, severe burns, paralysis, or loss of speech or hearing.

Generally, to make a successful TPD claim you require two legally certified medical practitioners to certify you will be unlikely to work again according to your TPD policy’s occupation definition.

Keep an eye on your tax

When your super fund receives your TPD benefit from the insurer, the money becomes an unrestricted non-preserved component in your super account. This means you can access the money as a lump sum, income stream or a combination of both. You can also choose to leave your payout in the accumulation phase of your super account.

Taking your TPD benefit as a lump sum or regular income stream can have important tax implications and may impact your future social security benefits, so it’s sensible to consult an independent financial adviser before making a decision.

If you are totally and permanently disabled and permanently unable to work, you can access:

• Your TPD payout once the fund receives it
• Any other super benefits you have in your account.

When you withdraw your TPD insurance and super benefits, the rate of tax payable on them will vary depending on several factors. These include your age when withdrawing your insurance and super benefits, whether you have reached your preservation age, the condition of release you are using to withdraw (e.g. permanently incapacitated, age 60) and the different tax components in your super benefits.

8-step checklist for the right TPD cover

1. Go online and check the TPD cover you currently hold with your super account.
2. Review your fund’s options for increasing or tailoring your TPD cover.
3. Imagine your personal and financial situation if you were to be permanently injured or severely disabled. Consider whether you and your family would have enough to survive and pay off your debts if you were unable ever to work again.
4. Investigate the cost and policy definitions used in TPD insurance outside super.
5. Compare your current TPD insurance cover and definitions with standalone policies outside super.
6. Talk to your super fund or an independent financial adviser for personalised advice about your TPD insurance needs.
7. Compare maintaining your current default TPD insurance within super, applying for more cover through your super, or buying a standalone policy outside super.
8. Read the definitions, exclusions and release conditions closely in the PDS documents to ensure there won’t be any nasty surprises if you ever need to make a claim.