Worked Examples and Checklists
How much TPD cover do I need? Worked example for Australians
Work out a TPD sum insured from debts, care and home modification costs, lost income and existing cover, and how TPD fits with income protection and the NDIS.
TPD cover needs a different calculation from life cover, because you are still alive and need to live on the payout. A practical estimate is debts to clear + immediate medical, care and home modification costs + a capital sum to top up your income for the rest of your working life − savings and existing TPD cover − the value of any long-term income protection. For many working-age people the result is close to, or higher than, their life cover need. Default TPD in super is often well below it.
This guide is part of the worked examples section. All figures are illustrative.
What TPD has to pay for
| Item | Examples | How to estimate |
|---|---|---|
| Debts | Mortgage, car and personal loans | Current balances |
| Immediate costs | Rehabilitation, equipment, home and vehicle modifications | Quotes vary widely; allow a buffer |
| Ongoing care | Paid support, a partner reducing work to provide care | Annual cost × years |
| Lost income | Gap between what you need and what the household still earns | Annual gap × years to retirement, or a capital-based estimate |
| Lost super | Employer contributions you will no longer receive | Super guarantee of 12% of ordinary time earnings since 1 July 2025 |
| Less | Savings, existing TPD cover, income protection benefits, NDIS support where relevant | Check what applies |
TPD and the NDIS
The National Disability Insurance Scheme funds reasonable and necessary supports for people with a permanent and significant disability who meet its access requirements, generally if the disability began before age 65. It does not replace lost income, and eligibility depends on the disability. Do not assume NDIS support will cover care costs; treat it as a possible offset to care costs only once eligibility is clear.
TPD and income protection together
Income protection replaces part of your income month by month, potentially to age 65. TPD pays a lump sum once. If you hold income protection to age 65, your TPD need is mainly debts and one-off costs. If your income protection only pays for two years, as in many super funds, TPD has to cover the income gap after that.
Worked example: a tradesperson with a mortgage
Illustrative: Tom, 42, is a plumber earning $105,000. He has a $430,000 mortgage and a $25,000 ute loan. His partner earns $60,000. Children aged 8 and 11. Savings $20,000. His industry fund provides $200,000 of TPD cover and income protection for two years.
| Step | Calculation | Amount |
|---|---|---|
| Debts | $430,000 + $25,000 | $455,000 |
| Immediate costs | Rehabilitation, equipment, home modifications, illustrative | $80,000 |
| Income gap after income protection ends | Household needs $90,000 a year without the mortgage; partner nets about $48,000; gap $42,000 × 21 years from age 44 to 65 | $882,000 |
| Lost super contributions | 12% × $105,000 = $12,600 a year; allow about half of 21 years' contributions as a simplified target | $132,300 |
| Total need | $1,549,300 | |
| Less savings | −$20,000 | |
| Less existing TPD in super | −$200,000 | |
| Gap | $1,329,300 |
That is a large number, and the premium for that much TPD on a plumber's occupation class will be significant. Tom has options:
- Lengthen income protection. A retail policy to age 65 (with a 90-day wait to manage cost) would replace most of the income gap. If it pays 70% of $105,000 = $73,500 a year, the income gap item mostly disappears. His TPD need then falls to roughly debts, immediate costs and the super top-up: $455,000 + $80,000 + $132,300 − $20,000 − $200,000 = $447,300.
- Hold TPD in super for the cash-flow benefit, and add more through the fund if it offers extra cover.
- Consider own occupation TPD outside super, since a plumber's skills may not transfer to equally paid work. See TPD definitions.
The combination of long income protection and moderate TPD is often cheaper for the same protection than very high TPD alone, though it depends on the quotes.
Tax on the TPD payout
- Retail TPD outside super: generally not taxed.
- TPD from super: a disability super benefit. The taxable component is generally taxed at up to 20% plus Medicare levy if you are under 60 (your preservation age), with a tax-free uplift based on your future service to age 65, and tax-free from 60. See tax on life and TPD payouts.
Because of the tax, a $200,000 TPD benefit from super paid at 42 can be worth noticeably less in hand. Build that into the sum insured if your cover is in super.
Mistakes to avoid
- Assuming TPD and life cover need the same amount.
- Forgetting that the TPD definition may not fit your work, so the claim fails even though you cannot work in your trade.
- Relying on a 2-year income protection benefit for a lifetime disability.
- Leaving out lost super contributions.
- Holding TPD only in an old super account that may become inactive; see the opt-in rules.
See also how much life cover do I need and choosing waiting and benefit periods.
Frequently asked questions
Can I have TPD without life cover?
Usually TPD is sold attached to life cover, and a TPD payout reduces the life cover by the same amount. Some insurers offer standalone TPD, typically at higher cost.
Does TPD cover partial disability?
No. It pays only for total and permanent disability under the definition. Partial loss of capacity is the role of income protection, which often has partial benefits.
What if I have TPD in two super funds?
You can claim on both if you meet each definition. Consolidating funds can cancel cover in the closed account.
Sources
- Moneysmart — TPD insurance
- NDIS — access requirements and supports
- ATO — super guarantee rate and tax on disability super benefits
