Some 4.3 million Australians have a disability. Many will develop their disability soon after birth or later in life. But for those who become incapacitated due to a severe illness or injury, disability insurance can be a lifeline. A payout can bring a great deal of financial peace of mind to you and your family.
What is disability income insurance?
Disability income insurance – or simply disability insurance – is a catch-all for a cover type that pays a benefit if a policyholder has a serious illness or injury.
Disability insurance is often used interchangeably with total and permanent disability insurance (TPD). But, in fact, disability cover can also be baked into trauma cover or income protection insurance. Each of these policies will pay out if you become disabled during your policy's term.
Where can I find disability insurance?
Let's look in more detail at the 3 insurances where disability cover is commonly held: total and permanent disability (TPD) insurance, trauma cover and income protection insurance.
Finder survey: What prompted Australians of different ages to take out TPD insurance?
Response
65-74 yrs
55-64 yrs
45-54 yrs
35-44 yrs
25-34 yrs
18-24 yrs
Buying a home
0.57%
1.74%
0.52%
5.58%
0.46%
Getting older (but not retiring)
0.57%
2.91%
2.07%
1.02%
0.92%
None of the above
0.57%
1.74%
4.66%
4.57%
2.75%
1.03%
Starting a new job
0.57%
2.33%
0.52%
1.52%
2.29%
1.03%
Starting my own business
0.57%
0.51%
1.38%
1.03%
Moving home
0.58%
0.46%
Having a baby
3.11%
6.09%
1.83%
Getting married
1.55%
2.54%
0.92%
1.03%
Retirement
0.51%
Buying a car
1.03%
Source: Finder survey by Pure Profile of 1110 Australians, December 2023
TPD Insurance
TPD insurance pays a lump-sum if you suffer a permanent injury or illness that means you are no longer able to work. In most cases, you must be off work for at least 3 or 6 months before your claim can be processed.
TPD cover is often bought as an optional extra with life insurance.
Disability insurance is commonly offered in TPD insurance held within superannuation. In fact, 86% of the 9 million Australians who hold TPD cover do so via their super fund.
An insurance policy held within super won't be fully underwritten; instead, they're offered on shared or group terms. This can be a barrier for claimants in some circumstances.
Trauma insurance
If you get seriously ill or are recovering from a severe injury, trauma insurance can pay you a lump sum. Typical injuries that trauma insurance can cover include the loss of limbs after a car accident, or major burns.
Trauma insurance, sometimes called critical illness insurance, is generally not held within superannuation.
It is offered as an optional extra with life insurance by three-quarters (12 out of 15) of the brands compared on Finder.
Trauma cover pays up to $2 million as a lump sum if you get diagnosed with an illness that's listed in your PDS – as many as 50 conditions might be included.
Income protection insurance
Income protection can be thought of as insurance for your salary. It pays a monthly benefit if you become sick or injured and can no longer work.
Income protection insurance will pay some of your lost income if you're unable to work because of a disability due to illness or injury.
It will usually cover a maximum of 70%-85% of your pre-tax income. Most commonly, the benefit period is restricted to 2 or 5 years - or until you turn 65 in some cases.
Just 35% of Australian said they'd be able to last more than 3 months if they lost their job tomorrow, according to Finder research.
Income protection calculator: How much cover you could get
We estimate that you could get...(click Calculate to see results)
This is for you to decide based on your finances and personal circumstances. A good general rule of thumb is to ensure any life insurance covers at least 10 times your salary.
Be aware, the cover level of your disability insurance may be linked to your life insurance. If your cover is linked – this often happens if it's bought at the same time – then your disability cover will either be the same or less than the benefit limit of your life cover. Alternatively, you could opt for standalone TPD insurance.
If I have worker's compensation, do I still need to consider disability insurance?
Yes. Even if you're protected by a workers' compensation scheme, any payouts may well fall short of your ongoing costs after suffering a long-term disability. This insurance, which is compulsory for employers, is more set up to cover lost wages, medical expenses and rehab.
Also, disability cover will insure you if you're injured or are diagnosed with a serious illness outside of work. This isn't true of workers' comp.
What is covered by the NDIS?
The NDIS, or National Disability Insurance Scheme, can offer you funding if you have a disability that is severe and is likely to be permanent. The national programme helps those with a disability to meet a range of expenses. This could to pay for a wheelchair, or make modifications to a disabled person's car or home.
With disability insurance, it's worth keeping in mind you may be eligible for a payout even if your disability is temporary. You are also able to use the benefit payment in any way you see fit – such as to pay rent or bills or maintain your family's lifestyle.
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Frequently asked questions
Disability insurance is a type of life insurance that pays a benefit if a policyholder has a serious illness or injury. It is often included in income protection insurance, and pays out if a person can no longer work due to a disability.
Disability insurance costs vary from provider to provider as well as the individual policyholder. For example, how risky your job is and your lifestyle will impact the cost of your disability insurance. Generally, the older you are, the more expensive your cover will be.
A total and permanent disability is generally considered to be any mind or body impairment that means it isn't possible for that person to be employed.
TPD insurance, or total and permanent disability insurance, is a type of cover that pays a lump sum in the event you become disabled owing to a severe illness that means you can never return to work. Whereas income protection policies offer ongoing monthly payments if you're unable to work temporarily – usually for up to 2 or 5 years.
As its name suggests, short-term disability insurance will offer a shorter benefit period. Such policies vary, and the cover option is more common in the American insurance market. It'll typically cover a policyholder for between 3 and 6 months.
On the other hand, longer-term disability insurance can pay out for anything between 5 and 20 years, or even until you reach retirement, depending on how your policy is structured.
If you have Medicare and private health insurance, consider the additional expenses that may arise as a result of your disability. They often fall outside the scope of health insurance and you will have to pay for these expenses out of your own pocket.
Depending on the severity of your disability, it may take months or years until you recover back to full health. With no other means to replace your income while you are taking time off work, ask yourself: will your savings be enough to cover your living expenses and ongoing rehabilitation costs?
James Martin was the insurance editor at Finder. He has written on a range of insurance and finance topics for over 7 years. James often shares his insurance expertise as a media spokesperson and has appeared on Prime 7 News, WIN News, Insurance News, 7NEWS and The Guardian. He holds a Tier 1 General Insurance (General Advice) certification and a Tier 1 Generic Knowledge certification, both of which meet the requirements of ASIC Regulatory Guide 146 (RG146).
Any occupation cover and own occupation cover are two types of cover that apply to Total and Permanent Disability Insurance (TPD) and Income Protection Insurance
Is TPD insurance tax-deductible? Do I need to pay tax if I receive a payout? Find out how TPD insurance is treated.
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