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Understanding the Differences: Income Protection vs Total and Permanent Disability Insurance

Understanding the Differences: Income Protection vs Total and Permanent Disability Insurance

Income protection insurance is a type of policy that provides financial support to individuals who are unable to work due to an illness or injury.
The insurance company will pay a portion of the policyholder's earnings, which can be used to cover everyday living expenses and bills.
This type of insurance is different from total and permanent disability insurance (TPD) in a few key ways.

One of the main differences is that income protection insurance generally covers only 75% of the first $20,000 of the policyholder's gross monthly income, and 50% of gross monthly income that exceeds $20,000 per month. This gap is meant to incentivize policyholders to return to work. Additionally, there is often a waiting period before benefits start to be paid. The longer the waiting period, the lower the premiums.

Insuring your most valuable asset
While many people would consider their home or their car to be their most valuable asset, it's your ability to earn an income that is most important in shaping your financial future. Statistically, two thirds of working Australians will suffer an injury or illness that will sideline them for 90 days or more. The majority of these people would not be able to pay their mortgage or meet car finance and other loan commitments without adequate income insurance.

TPD, on the other hand, provides a lump sum payment to individuals who are permanently unable to work in their occupation or in any occupation for which they are suited by training, education or experience, or if they've lost the ability to function cognitively or physically. The money can be used for things like modifying a home, medical care or procedures.

Another key difference is the amount insured under income protection cover is usually limited to 75% of the policyholder's income, whereas the amount insured under a TPD policy can vary.

Many people have their income protection insurance, life insurance or TPD insurance built into their superannuation. This can have advantages such as lower costs and potential tax benefits, but it's worth noting that all benefits within superannuation, including insurance proceeds, are subject to Superannuation Industry Supervision legislation. It can be difficult to satisfy the legislation's definition of "permanent disability", which can make it more restrictive than definitions used by insurance companies.

Overall, income protection insurance is a valuable option for those who want to ensure they have financial support if they are unable to work due to an illness or injury. It is different from TPD in that it provides an income stream, rather than a lump sum payment, and the amount insured is generally limited to 75% of the policyholder's income. 

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Understanding the Differences: Income Protection vs Total and Permanent Disability Insurance Understanding the Differences: Income Protection vs Total and Permanent Disability Insurance
Income protection insurance is a type of policy that provides financial support to individuals who are unable to work due to an illness or injury. The insurance company will pay a portion of the policyholder's earnings, which can be used to cover everyday living expenses and bills. This type of insurance is different from total and permanent disability insurance (TPD) in a few key ways. - read more
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When considering life insurance, you're planning and preparing for an event that most of us would rather not think about. But life insurance represents a critical step in managing your personal finances and ensuring your family's well-being. - read more
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If you are like most people on this planet, you are not financially free. You would not be able to stop working and still support yourself and your family from your financial resources. Your continued ability to work to earn an income would therefore be one of your greatest assets. - read more
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It's trite but true to say that, for most people, their most valuable asset is their ability to earn an income. But how relevant is income insurance to most Australians? - read more
DIY Review Checklist for your Income Protection Insurance DIY Review Checklist for your Income Protection Insurance
If you have an income protection insurance plan already - or are thinking about buying one, then you need to be aware that these policies require regular maintenance and careful scrutiny to ensure that they adequately meet your needs. Unfortunately, many people purchase income protection insurance policies only to find out about their shortcomings at claim time. - read more

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Knowledgebase
Insurance Policy:
Broadly, the entire written contract of insurance. More narrowly, the basic written or printed document, as distinguished from the forms and endorsements added thereto.