Total (Temporary) and Permenent Disability Insurance

Total and permanent disability (TPD) insurance generally covers a person against an illness or injury that prevents them from returning to their previous type of work. It forms part of wealth protection strategies, providing asset protection when needed most.

TPD is offered as an extension to a term life, trauma, whole of life policy or standalone policy. TPD insurance means the 100% disability of the insured. A lump sum may be paid in the event that a person:

• Is unable to work;
• Has lost a limb or sight;
• Is unable to conduct basic daily living activities.

There are two definitions of being unable to return to work within TPD insurance:

• The first is where a person is incapacitated such that they will never be able to recommence work in any occupation suited to them by education, training, and experience.
  
• The second is where the insured has been unable to work for six months and is incapacitated such that they will never be able to work again in their own occupation. Premiums for this type of insurance are about 50% more expensive than for any occupation insurance.

The cover is generally available to people aged between 16 and 60 and can be renewed up to age 65. The benefit will be payable provided the person suffers total and permanent disablement before age 65.

The cover will cease when the insured has not been working full time for at least six months (except as a result of TPD) or upon them turning 65. If, as the result of incurring a total and permanent disability and subsequently receiving a benefit, the term life insurance component of the policy will be reduced by the amount of the TPD benefit paid.

A TPD insurance policy can be held within a superannuation fund. It will be held as part of a term life policy within the fund. A payment of a TPD benefit may receive concessional tax treatment at member level as a result of being from within a superannuation fund. For these purposes, superannuation membership may be through a fund established by the Insurer, or it can be through self managed superannuation funds.

NOTE: In a National Tax Liaison Group meeting on 15 March 2005, the ATO advised that their interpretation of Section 118-37(1) of the Income Tax Assessment Act 1997 does not provide any tax concessions where a TPD payment is paid to a trustee of a superannuation in respect to a member of that fund and, accordingly, the proceeds will be subject to CGT in the hands of the trustee. Refer to "CGT treatment of total and permanent disablement (TPD) policies" in Related Content below.

Click on this link to view the minutes of the 15 March 2005 meeting: 15 March 2005 Meeting Minutes

Click on this link to view more recent discussions of the issues in the draft minutes of the 7 June 2006 meeting: 7 June 2006 Meeting Minutes 

Click on this link to view tax determination TD 2007/4 in which the ATO explains that the words "policy of insurance on the life of an individual" are not limited to their common law meaning but also cover other policies to the extent that they provide for a sum of money to be paid if an event happens that results in the death of an individual.

At Continuum Financial Planners we see TPD Insurance as an integral part of the financial planning strategies we implement for our clients – and we follow that up with annual reviews, ensuring that the intention to be able to continue to make debt repayments, provide for children’s education, continue wealth accumulation for retirement planning and provision for dependants to be financially secure is preserved over time and with changing circumstances. You can benefit from this service: contact us now for a meeting with a financial planner (that will be at our cost at first instance).

We acknowledge the substantive input to the content of this article from the Deutsche Bank Desk Caddie. Modifications have been made to adapt it for the readability for our users.