“Do I need all three insurances - income protection, trauma insurance, and TPD insurance?"
- Kez in Cremorne, NSW
Top answer provided by:
Hi Kez and thanks for your question.
Let me first point out there are in fact four types of “life” insurances. The fourth, in addition to the ones you’ve mentioned, is Death cover, which is probably the most common and best-understood type of cover. It simply pays out a lump sum in the event of your death (or terminal illness) to your nominated beneficiaries. The other three types are less well understood and many people like you wonder whether you actually need them.
Your need for insurance really depends on many factors, including (but not limited to) your level of assets, debts, your family circumstances, the number and age of dependents, and your lifestyle. This is where personal financial advice can be really valuable to determine the types and levels of insurance most appropriate to your personal circumstances. This is important to ensure you don’t leave yourself underinsured, which may result in financial stress and hardship down the track, nor do you want to be overinsured paying too much in premiums.
Kez, given I don’t know anything about your personal situation, I can only give you some general advice about the three insurances you’ve asked about. They all serve different purposes so let me explain a little bit more about them.
Income protection does what it says on the tin, protect your income. If you find yourself unable to work due to sickness or injury for an extended period of time, income protection cover will kick in and pay you a monthly payment, generally up to 75% of your usual income. This is intended to minimise the impact on your cash flow, allowing you to continue to live your lifestyle and avoid having to draw down other assets or take on more debt to meet your expenses.
Income Protection cover is subject to a specified waiting time, i.e. the time before the benefits start being paid out following the illness or injury, and a benefit period, i.e. the maximum period of time the income protection payments will continue. It is important to match both the waiting time and benefit period to your circumstances, as they can have a significant impact on the insurance premiums. Factor to consider might include annual and sick leave entitlements, current savings you can draw on, family support etc.
Trauma cover pays a lump sum in the event you’re diagnosed or suffer one of a specified list of events. These generally include diagnosed conditions such as most cancers, heart conditions, strokes and other illnesses, but may also include physical injuries such as blindness or loss of limbs. This list of covered events can differ between insurance providers so it’s important to check these carefully, particularly for conditions that you may be more prone to due to family history or other risk factors.
The reason for taking out Trauma cover is generally to cover out of pocket medical expenses, future care needs, and potentially missed income. A Trauma payment can provide welcome financial relief at what is often a very difficult and stressful time for the insured person, as well as their immediate family.
Lastly, TPD (or Total Permanent Disablement) is also a lump sum benefit, paid out if you meet the definition of being totally and permanently disabled. In general terms, this would mean you have suffered an illness or injury, resulting in you not being able to work and unlikely to ever work again, and/or the loss on independence. This definition does vary depending on the specific type of TPD cover you have, and whether this is held through superannuation of not. It may be specific to your own employment, i.e. “own” occupation TPD, and others are more general, i.e “any” occupation TPD.
Should you find yourself totally and permanently disabled, a TPD payment may help you to extinguish any debts and pay for ongoing medical and care needs or fund modifications to your home such as wheelchair access etc.
Whilst each of the three insurances you’ve asked about have different benefits, it is not uncommon for people to claim multiple benefits resulting from the same event, such as a Trauma payment for a cancer diagnosis followed by an Income Protection claim whilst they’re going through chemotherapy treatment.
Whether you “need” all three depends on your own personal circumstances. Furthermore, what I’ve just discussed is only the very basic definitions of the three insurances. There are a raft of other features and options that I have not touched on here, but are critical to consider to tailor the insurance to your own specific needs.
Kez, I hope this goes some way to answering your question, but ultimately personalised advice will guide you through the complexities of insurance to ensure you end up with an appropriate level of cover, and importantly, only the cover you need.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.