Of all the types of insurance people buy and hope they never use, total and permanent disability (TPD) tops the list.
Car accidents, as well as cancer and cardiac arrest, spring to mind, but to overcome TPD's bad rep for not paying out on claims, providers have been quietly adding claimable conditions, including Alzheimer's disease and even depression.
However, misunderstanding persists.
Adam Smith, who owns and advises for Perth-based estate and business succession planning firm The Corporate Will Company, says many members of the public think TPD is accident coverage. "I always say to my clients, 'I want to dispel a myth upfront', particularly for white-collar professionals where it's more likely to be an illness," Smith says.
He adds that illness accounts for 85 per cent of TPD claims. The remainder is caused by vehicle or other accidents. "It could be anything from stomach cancer to depression. If mental illness is preventing someone from working again, it's a claim," he says.
AIA Australia chief distribution and marketing officer Damien Mu says the industry has been working hard to change the perception that TPD claims are difficult. Mu says the main changes revolve around TPD definitions and the speed with which claims are paid. Having said that, he notes claims still follow procedure. "To say someone is never going to return to work again, unless it's a very obvious condition or injury, sometimes there will be a need to have an assessment," he says.
Smith says the key changes, from his perspective as an adviser, have been shortening the qualifying period to three months from six months and changing the qualification wording from "unable to work again" to "unlikely to work again".
"I think it's great that the definitions for TPD are changing. They're far more conducive to allowing claims," he says.
"However, having said that, we've had 20 income protection claims paid out in the last three years. In my whole 22 years as an adviser, I've only had two TPD claims."
He says one claim was for prostate cancer, the other was for chronic depression.
"Two claims in 22 years. That tells the story," he says.
Who needs it?
Income protection and trauma insurance, which are relatively newer products, have encroached on TPD's share of wallet.
"More recently, the question being asked by financial advisers and the superannuation funds is whether income protection insurance is more relevant than TPD," OnePath head of product, marketing and reinsurance Gerard Kerr says.
Kerr says TPD pays a lump sum based on a permanent disability and income protection pays out a monthly income based on a temporary disability. "They serve a different purpose, but superannuation trustees and also financial advisers and customers are asking themselves how these benefits work together in a complementary sense," he says.
CommInsure general manager of retail advice Tim Browne says more advisers have been selling life and trauma insurance combinations over the past five years.
Trauma insurance covers critical illness or critical injury. It's a short-term benefit paid on diagnosis to help policyholders deal with a crisis.
"That's why trauma is far more expensive than TPD. There's a much higher likelihood that one might suffer a trauma than TPD," Smith says.
He says it's all part of helping clients balance peace of mind versus cost. "If something has to go, I'd be more inclined to let TPD go before trauma," he says.
However, Browne says TPD definitely has a role to play because it covers things trauma doesn't.
"While trauma insurance covers 30 to 70 more common medical conditions, there are still other conditions that are not covered, such as stress and mental illness, as well as back injury or musculoskeletal problems," he says.
Smith says debt levels play a role in determining whether a client should sign up for TPD. "Certainly where there are large levels of debt, we've always got to have the conversation," he says.
"If someone is unlikely ever to work again, what would it mean for themselves and their families from the debt position? I actually think it's important to have some TPD in place to at least alleviate debt."
However, he says the recommendation is on the proviso that a client has income protection insurance in addition to TPD. "If you're not going to work again, you'd like to clear your debt and have an income for the rest of your working life," he says.
Where income protection is not being used, he says he would advocate higher levels of trauma cover.
A super solution
However, the full suite of insurance coverage - life, TPD, trauma and income protection - costs money.
"As with anything, when people look at insurance, they're looking at affordability. Sometimes the superannuation fund is a vehicle that's used to help fund insurance cover," Kerr says.
That can have its own pitfalls because the golden rule is, no matter what happens to you, get paid as quickly as possible. However, super funds have their own definitions.
"The superannuation environment has its own statutory definition of what they classify as totally and permanently disabled," Kerr says.
"Even if you didn't have any cover and you were amassing your fund, let's say at age 45 you had a bad accident, and you think, 'I'd like to be able to tap into my superannuation', there are criteria under which they would release the funds before retirement age, and one of the criteria is being totally and permanently disabled.
"They call out what the regulator says is the definition of being totally and permanently disabled. Sometimes that definition doesn't exactly match like for like with the insurer's definition."
The super fund would act according to the TPD definition under the Superannuation Industry (Supervision) (SIS) Act.
Another pitfall is that even if the insurer agrees to pay a TPD claim, the proceeds may need to remain inside the super fund if the policyholder's condition does not meet the SIS Act definition of TPD.
In that case, Kerr says the policyholder may have to wait until they're 50 or 55 to meet an age criterion for accessing the proceeds of the claim.
Nonetheless, there is an upside.
"Generally, advisers are very good at explaining the pros and the cons of having your insurance inside superannuation and the areas to consider at a claim stage," he says.
Marc Fabris, national manager of sales strategies and research at Zurich's life risk business, says the company has introduced a series of changes to do with linking 'own occupation' benefits outside super to minimise the overall cost.
"We have recently announced that as part of our March 2012 product updates, we are introducing a new 'superlink' TPD feature, which gives clients the flexibility to structure 'own' and 'any' occupation TPD inside and outside super," Fabris says.
Own occupation, the narrowest TPD definition, means you are totally and permanently unable to work in your own occupation. Any occupation encompasses your own plus any other occupation you would be qualified to do. "This is of particular benefit to self-managed super fund (SMSF) owners, who can now structure their insurance in a more tax-effective way without compromising accessibility of claim benefits," Fabris says.
The homemaker category forms the third of what Kerr calls the three pillars of TPD in addition to the 'own' and 'any' occupation disability definitions.
"It could equally hit people who aren't in what we call non-pay-for-income occupations. Homemaker is the classic example. If anything happens to them, the whole household is turned on its head," he says.
A taxing problem
TAL retail life division chief executive Brett Clark says the main change in TPD is the way it is structured inside a life insurance plan. Taxation is at the heart of the change.
"There was a change in the tax treatment of TPD going back to July 2011, which removed a tax deduction that had been available for own-occupation TPD," Clark says.
"As a result, that has required products to change in the way they structured TPD compared to what part of a benefit should be owned by a superannuation fund and what component should not be owned by a superannuation fund because the tax deduction is no longer available."
