What’s the difference between Income Protection, TPD and Trauma cover?

What’s the difference between Income Protection, TPD and Trauma cover?

When I recommend an insurance portfolio for a client, it is generally a very holistic exercise, taking into account many different personal, family and financial goals and making sure as many risk areas as possible are managed with insurance.

One question that often comes up is “why have you recommended income protection, trauma and total and permanent disability cover (TPD) – don’t they all do the same thing?”. And it is a very good question, because as you will learn there is a chance these policies could overlap in the event of a claim, however the truth is they are all different types of sickness, accident and injury cover and all have their own nuances under which they are claimed.

What is income protection?

Put simply, income protection protects your income. Income protection:

  • replaces your income in the event that you cannot work due to any sickness, accident or injury.
  • It pays you monthly directly into your bank account to replicate the income you would receive from your pay.
  • This means you can continue to pay your rent/mortgage, food, bills and all the other everyday costs of living that will continue to occur regardless of your sickness, accident or injury.

 

What is total and permanent disability cover?

You claim on this policy in the event that you are totally and permanently disabled. To be completely blunt: if you claim on this policy, it’s a medically severe situation and financially rather “end game” because the insurance company and your doctors have agreed you will not be in a position to work or earn income ever again. TPD cover:

  • is payable as a lump sum amount of cover. Think of it as a big cash injection. We help you calculate how much cover you may require.
  • TPD cover means you are never working again and you are never able to earn income ever again. Therefore we need to ensure that you have access to a large amount of cash quickly to set yourself up for the rest of your changed life.
  • You can use the proceeds from a TPD claim for whatever you want. Let’s say for example you have had a car accident and you are now a quadriplegic. It is likely you would use the money to repay debt on your home, modify your home for your changed lifestyle needs or purchase a home to cater to your changed lifestyle needs, as well as pay for other costs associated with your changed lifestyle needs.
  • As a guide, a wheelchair accessible vehicle cost approximately $100,000 in Australia. If you don’t have that money and more lying around, it is likely we would consider TPD cover as a funding to tool to provide for you.

 

What is Trauma cover?

This policy exists to plug the gap that may exist between income protection and TPD cover. Trauma cover basically says “okay, wow, you’ve been diagnosed with something really bad like cancer, heart attack or stroke, but that’s not necessarily a death sentence and it doesn’t necessarily mean that you’re going to be out of the game for ever (TPD) but it is going to knock you about for a couple of years. So take this money and use it to recover, use it to do whatever you need to do to overcome your temporary health event”.

Trauma cover:

  • is payable as a lump sum of cover – another cash injection.
  • is the only type of disability cover that is pre-defined by a specific list of approximately 60 medical conditions. If you are diagnosed with a listed condition and meet the medical diagnosis, the money is deposited into your account.
  • is targeted at shorter term, temporary health events as opposed to total and permanent disability cover that targets the long term, severe and permanent events.

 

A simple diagram

If you work for a living and rely on your income, income protection must make up the basis of your disability portfolio. From there we bolt on TPD and trauma cover to provide lump sum cash funding, provide you access to tax-free cash to stabilise your financial situation and set you up accordingly.

TPD Cover

A worked example

To really understand how these policies interact and how the combination of all three together are a powerful financial tool, let’s talk through an example.

  • I had a client who was diagnosed with cancer some time ago.
  • Upon diagnosis of cancer the client was paid their trauma cover. Approximately $250,000 deposited into their bank account, tax-free, to do what they needed to do to recover.
  • Soon after the trauma claim was finalised it became clear the client was unable to work due to the demands and side-effects of cancer treatment. We then kicked off their income protection claim to ensure that monthly income was coming in to attend to the cost of everyday living.
  • The client beat cancer and went back to work.
  • A few years later the cancer unfortunately returned. The client had already claimed on their trauma policy and so was able to claim for the same condition twice. However they were able to make another income protection claim and so once again, income steadily came in to pay the mortgage, bills food and other expenses.
  • This went on for a couple of years until, due to the nature of the client’s very specific occupation and the unfortunate progression of the cancer it became clear that this client was unable to do their job and would be unable to do this job at this level ever again. We instigated a total and permanent disability claim for the client.
  • The client claimed approximately $1 million under their TPD policy.
  • Unfortunately approximately 2 years later the client passed away from the cancer and we instigated their life insurance claim for their surviving family members.

 

Stepping through the policies

One thing I always remind people of is that insurance doesn’t mean that you will get better. The most powerful thing this insurance does for you is that it gives you choice and freedom. That client, and countless other clients, have not had to worry about any financial issues on top of their health concerns due to these policies.

And the other key is that whilst we can see overlap in the above examples, there are examples where the policies do not overlap and only one of the policies may be claimable. It is vital to for all scenarios and make sure that all risks are mitigated as best we can. And the only way to mitigate as many risks as possible on sickness, accident and injury is to use these three policies together and calculate them properly so that they work well together without costing more money than they need to.

Do you know which policies you have? When was the last time you reviewed them? Call us on 02 9633 5530 or contact us here to discuss your situation or ask any questions.

 

Please note this information is general advice only. Please seek advice before acting on any information in this article.

Sacha Loutkovsky
sacha.l@orionfg.com.au
2 Comments
  • nicole armstrong
    Posted at 20:11h, 18 January Reply

    My partner has a low amount of income protection thru his super and before deciding to increase the level of protection he asks how long that protection should last. The choice of 2, 5 or age 65 confuses us.

    • Sacha Loutkovsky
      Posted at 09:29h, 19 January Reply

      Hi Nicole,

      Thanks for your comment. The choices of 2, 5 or age 65 refer to how long you would like the Income Protection to pay you for and refer to 2 years, 5 years or all the way to age 65 respectively. I generally prefer a longer term Income Protection policy and often recommend to age 65 as this will mean that if you can never work again then you will be paid your income every month all the way through to age 65, as opposed to maximum of 2 years or 5 years payment. Of course this is general advice and depending on your personal circumstances your outcome may be different. I think it would be good for you to speak with us directly as there are other issues to consider on Income Protection through super, mostly the quality and loopholes I’ve referred to in other articles that you can find on our blog. Please contact us on 02 9633 5530 if you wish to discuss and ask for me.

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