TPD cover you need.
Recommended TPD cover
—
Income replacement
—
Debts + care
—
Your breakdown
Updates live as you type| Component | Amount |
|---|
The cover that has to do the most work
Total and permanent disability cover pays a lump sum if illness or injury stops you working again for good. It is the most demanding policy to size, because it has to do several jobs at once. It clears the debts you can no longer service, replaces every dollar of income you would have earned between now and retirement, and funds whatever extra medical or care costs the disability brings. Get the figure too low and your family is forced to sell the home or run down savings far too early. Get it too high and you pay premiums for cover you do not need. This calculator builds the number from the ground up, then nets off what you already have.
Why future income is discounted, not just multiplied
The largest piece is usually the lost income. A naive approach multiplies salary by years to retirement, but that overstates the lump sum, because a payout received today can be invested and will earn a return while you draw it down. The tool instead takes the present value of your income stream using a 3 percent real discount rate, meaning a rate after inflation. In plain terms, it asks how much money you would need invested today, earning 3 percent above inflation, to replicate that salary every year until you retire. The choice of 3 percent matters: a higher discount rate would shrink the required lump sum, a lower one would lift it. It is the single most influential assumption in the result, so it is worth understanding rather than glossing over.
A worked sum for a 45-year-old breadwinner
Take the defaults: $450,000 of debts, $90,000 of income to replace, 20 years to retirement, $200,000 of extra care and medical costs, and $150,000 of savings plus existing TPD inside super. The present value of $90,000 a year for 20 years at a 3 percent real discount comes to $1,338,973. Add the debts and care, subtract what you already hold, and the recommended cover lands just shy of $1.84 million.
The chart shows how the three needs stack up and how your existing resources chip away at the total.
The default-cover trap inside your super
Most working Australians already hold some TPD automatically through their super fund, which is a genuinely good thing, because the premiums come out of your balance rather than your take-home pay and the cover is usually issued without medical underwriting. The catch is the amount. Default cover is set for the average member, not for your debts and dependants, and it frequently sits well below what a proper needs analysis produces. In the example above, a typical default sum might be $150,000 or $200,000 against a need approaching $1.84 million. That gap is exactly the point of running the numbers. A common mistake I see is people assuming the super default is enough simply because it exists.
Reading the result sensibly
This estimate is for working-age people with dependants, a mortgage, or both, who want a defensible starting figure before speaking to an adviser. Treat it as a needs analysis, not a quote. Two refinements are worth knowing. First, the definition matters as much as the dollar amount: an own occupation policy pays if you cannot do your specific job, while the cheaper any occupation definition pays only if you cannot do any job you are suited to, and the latter is much harder to claim on. Second, TPD held inside super can have tax deducted from the payout depending on your age and the taxable component, so the net amount your family receives may be lower than the sum insured. A practical tip: review the figure whenever your mortgage, income, or family size changes, because all three feed straight into the number.
Common questions
Is TPD the same as income protection?
No. TPD pays a single lump sum when you are permanently unable to work, designed to clear debts and fund the rest of your life. Income protection pays a monthly benefit, usually up to 70 percent of your income, while you are temporarily off work, and it stops once you recover or reach the end of the benefit period. Many people hold both, because they cover different risks.
Should I hold TPD inside or outside super?
Inside super is cheaper on cash flow because premiums come from your balance, and the premiums are effectively concessionally treated. The downsides are that it slowly erodes your retirement savings, the any occupation definition is more common inside super, and the payout can be taxed. Holding it outside super costs more out of pocket but gives you a cleaner definition and a tax-free benefit. The right mix depends on your budget and how tight your retirement plan already is.
Why does the recommended figure feel so large?
Because it is replacing a working lifetime of income in one payment, plus debts and care, not just a year or two. The present value of two decades of salary alone runs past a million dollars in this example. If the number looks daunting, remember you subtract savings and any cover you already hold, and you can decide to insure a portion of the need rather than every last dollar.