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TPD, as it is sometimes known, is a work-dependent benefit. This means that it pays if you are never able to work again. That is the permanent part. But – there is a ‘but’, it may not be entirely that permanent. Confused? Good, now you can read on and I’ll explain.

Key Points:

  • What is TPD?
  • What is ‘permanent’ (own vs any)?
  • What the numbers say

Total and Permanent Disability, (“TPD” is easier to say), pays you a lump sum, tax free amount if you are never able to work again. From a risk perspective, people will have this type of cover to give them protection is a few ways. I will use some examples to highlight some these.

If someone is younger, perhaps in their twenties or thirties, they potentially have another 2-3 decades of work ahead of them. From a ‘lost earnings’ perspective, let’s see what that looks like. We’ll use an average NZ income of around $60,000 gross a year. This means that for an employee contributing a standard 3% to KiwiSaver, the net income will be around $46,300 a year. Over 30 years that is $1.38m in lost earnings. [Note: a person’s living costs may decrease with a disability, however there could be costs for ongoing care and support]. This is a blunt example, but shows how some people go about establishing a benefit amount for the lump sum payment.

Another example is to look at a debt repayment situation. Let’s say a family owes $500,000 on a mortgage and other debts. It costs them around $2,500 a month to service these debts. If the main income earner has an accident or is ill with something that means they cannot ever work again, that family is at risk. Who is going to pay the debts? A TPD lump sum payment could be used to clear all the debt. This would have the added bonus of ‘freeing up’ $2,500 of commitment each month, because those debts don’t need to be serviced.

Lastly, where costs and budgets are a factor, there is another method. Some people will look at having some time for ‘breathing space’. What do I mean by this? In the event of something terrible happening, a family (or single person) may want a few years of breathing space while they figure out their new living situation. The method then is to use a multiplier on their income for the number of year that the client thinks they’ll need. Again, using the above example of a person on $60,000 a year, if they want 3 years of ‘adjustment’ time, the benefit amount would be (3x $60,000) $180,000. Again, the client may wish to use gross or net figures.

These examples are fairly simplistic, but serve to indicate how a client may choose to use TPD in their product stack.

What is ‘permanent’ (own vs any)?

Because we are talking about an inability to do your work, the main variable with this type of product is whether you opt for ‘own occupation’ or ‘any occupation’. That one word can mean the world of difference. At the point of application, you need to specify the type of cover. From a pricing perspective, ‘own’ will cost more than ‘any’.

It comes down to whether you are too sick or incapacitated to work in just your own occupation, or if you are severely munted (yes, that is a technical term!) and cannot work in any occupation at all.

An example might be of an accountant. They need their sight to operate the computer and play around with their client’s cashflow forecasts. If the person lost their sight in both eyes, it is unlikely that they would be able to continue in their ‘own’ occupation as an accountant. In this case they would get their TPD payment for ‘own occupation.

Potentially though, they could retrain and become a call centre operator, helping people on the phone. If their TPD was for ‘any’ occupation, they might not get a pay out from their provider. If however, this same accountant was unable to feed, dress and shower by themselves, they would meet the requirements of the ‘any occupation’ definition.

What the numbers say

Giving pricing in a generic way is always problematic. I said the same thing last week (copy and paste – it’s fantastic!). However, I constantly come across people who assume that disability insurance is more expensive than it actually is. The purpose of the two examples below is to indicate that even a modest insured amount can be affordable for less than a cup or two of coffee a week.

  • Brian 45, non-smoker on $250,000 TPD cover, own occupation, would be around $7.72-$8.47 a week
  • Julie 30, non-smoker on $500,000 TPD cover, own occupation, would be around $3.24-$5.51 a week

These premiums could also be levelled, so that the premium each year is constant. Levelling the premium would change the prices above, but it is a good cost-effective option for many people.

TPD may sound like a contagious disease, but in reality, it can be an extremely useful product to have in your personal insurance product stack. Speak with your adviser to find out more.

Dominic Bish

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