Ask an Expert: How is TPD insurance defined and assessed in Australia?

Total and permanent disability (TPD) insurance in Australia provides a critical safety net for millions of Australians and their families. It is designed to pay customers a lump sum benefit if they become seriously disabled and are unlikely to work again. 

Further information on how TPD is defined in the Australian market can be found here: Total and permanent disability (TPD) insurance 

TPD definitions in Australia differ depending on whether the insured is engaged in work or not. 

Those engaged in work have an additional assessment tier, to determine the impact of their illness or injury on their ability to work again. The nature of the assessment will also depend on whether the cover is held within a superannuation arrangement.

An example of a current market definition used by a life insurer in Australia can be found here: TAL definition example.

Assessing TPD eligibility and multiple minor conditions

In contrast to other countries, Australian policies do not rely solely on a fixed Whole Person Impairment (WPI) percentage, such as 81%, to determine TPD eligibility. Instead, they integrate functional impact assessments (eg Activities of Daily Living or ADLs), which offer a broader and more nuanced evaluation of the severity of the disability.

Further information can be found here: Table 5.3: Permanent impairment payments | Safe Work Australia; TPD Insurance Definitions | Duties, Hours & Income | TAL

There are challenges regarding multiple minor conditions that contribute to the 81% disability rating. 

One challenge with impairment-based assessments is that cumulative minor conditions may technically meet the threshold without significantly impacting a person’s functional ability. This can lead to:

• Higher claims acceptance rates for conditions with limited real-world disability impact.
• Potential risk of anti-selection, where claimants with pre-existing conditions may qualify more easily.
• Difficulties in ensuring fair and objective claim determinations.

To address these concerns, Australian life insurers often use a combination of medical assessments, vocational considerations, and ADL evaluations to assess a claim holistically. 

This allows them to distinguish between claimants with severe functional impairments, and those whose conditions may meet a numerical threshold but do not significantly impact their ability to engage in suitable work.

Underwriting and TPD claims process

In Australia, the underwriting and claims processes for TPD insurance are designed to assess risk accurately and ensure fair claim evaluations. Underwriting involves evaluating an applicant's risk profile to determine coverage terms and premiums. 

Key factors considered include:

• Age: Risk assessments often consider the applicant's age, as certain age groups may have higher susceptibility to specific health conditions.
• Body mass index (BMI): BMI is evaluated since higher values can increase the risk of health issues like diabetes and heart disease. 
• Personal health history: Applicants provide detailed medical histories, which may necessitate further medical tests or reports.
• Occupation and lifestyle: Jobs involving higher physical risk or hazardous activities can influence underwriting decisions. 

The TPD claims process typically involves:

• Notification: Inform your insurer promptly upon becoming totally and permanently disabled due to illness or injury.
• Documentation submission: Provide comprehensive evidence, including medical reports detailing the disability and its impact on employment capabilities, employment records, and other relevant documentation. 
• Assessment: The insurer reviews the submitted information to determine if the claimant meets the policy's TPD definition. This may involve consultations with medical professionals or additional evaluations.
• Decision: After thorough assessment, the insurer communicates the claim outcome. If approved, the TPD benefit is disbursed as outlined in the policy.

It's important to note that TPD definitions and criteria vary among policies. Further information can be found here: Total and permanent disability (TPD) insurance explained | Guided Investor

Attributable to Michael Johnston, General Manager, Policy — Council of Australian Life Insurers

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