Having life, TPD and trauma insurance in one policy can provide comprehensive protection and save you money on cover.
Choosing the right life insurance policy can be a tricky proposition. Life, TPD and trauma cover all offer crucial financial protection against the uncertainty of the future, so how can you decide which option is right for you?
Depending on your circumstances, to get the right level of cover you may want to combine TPD and/or trauma insurance with your life cover policy. This is quite simple to do and provides a number of advantages. Let’s examine the benefits of bundling cover and how to go about it.
Whats the difference between life, TPD and trauma insurance?
- Life cover. Life cover provides a lump sum benefit to your beneficiaries if you die or are diagnosed with a terminal illness. You can use the benefit to pay off debts, replace your lost income and provide for your loved ones.
- TPD cover. TPD stands for total and permanent disability, and this type of cover provides a lump sum benefit if you suffer a serious illness or injury that leaves you totally and permanently disabled. You can use this benefit to replace lost income, cover medical and rehabilitation expenses, cover the cost of home modifications and help provide for your family. Find out more in our TPD insurance guide.
- Trauma cover. Trauma insurance, or critical illness insurance, pays a lump sum benefit if you suffer a specified serious medical event, such as a heart attack, a stroke or cancer. You can use this benefit to pay off medical bills and other immediate expenses, continue paying your mortgage or rent and replace income lost as a result of your illness.
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What are the benefits of combining cover?
You can get each of the three policies listed above as standalone cover. However, if you feel that you could benefit from the extra level of protection provided by more than one of these policies, it’s possible to add both TPD and trauma cover to your life insurance policy.
Why should you combine life, TPD and trauma insurance into one policy? There are plenty of reasons:
- Comprehensive cover. Instead of relying on just one type of cover for you and your family, you can enjoy the financial protection of multiple policies. This means you’ll have cover for a much wider range of risks.
- Premium discounts. When you combine life insurance covers, you can usually access discounted premiums across all the policies you take out. These discounts can be quite significant and could save you a substantial amount of money.
- Simplicity. Rather than maintaining separate life, TPD and trauma policies, you only have to worry about managing one policy. This means you only need to remember one premium payment, which can help save you a lot of time and stress. It can also make things much easier when you need to make a claim.
- Flexibility. Some insurers give you the option of linking policies held inside your superannuation fund with policies held outside super, allowing you to combine the tax benefits of holding cover through super with the higher level of cover provided by non-super policies.
Bundling vs separate cover
If you’ve decided that bundling life, trauma and TPD insurance together in one policy sounds like the best option for you, it’s important to be aware that there are two ways to go about this. You can either have bundled life insurance or standalone cover. At first, these might sound like more or less the same thing, but there are some key differences you should be aware of.
Here's an example of the difference between bundling and standalone cover.
|Details||Bundled cover||Standalone cover|
|What is it?||Life, TPD and trauma insurance as one individual policy||Life, TPD and trauma insurance structured into separate segments of a policy|
|Life cover||$1 million||$1 million|
|Does claiming on one type of cover affect sum insured on other types of cover?||Yes||No|
|Total cover provided by policy||$1 million||$1.8 million|
|Premiums||Less expensive||More expensive|
To bundle or not to bundle?
David is looking to take out life cover, trauma insurance and TPD cover in one policy, but he’s not sure whether to choose bundled or standalone insurance. He wants a policy that provides $1,000,000 life cover, $500,000 TPD cover and $300,000 trauma cover, so he compares the benefits and cost of bundling and choosing standalone cover.
The table below outlines the difference between the two options. As you can see, one key drawback of bundled cover is that it doesn’t provide the same level of financial protection as standalone cover. In this example, the difference is $1 million vs $1.8 million. However, it still provides the convenience and peace of mind of cover for a wide range of risks, and the lower level of cover also means it offers cheaper premiums than a standalone policy.
Bundling: When it comes to claiming
With bundled life insurance, your life, TPD and trauma cover are collected as one individual policy. Also referred to as a linked or combined policy, bundled life insurance allows you to make a claim under a policy if the life insured dies, becomes totally and permanently disabled or suffers a serious trauma event. However, if your claim for one cover type is paid out, the sum insured for the other types of cover in your policy is reduced by the claim amount.
For example, let’s say you have a policy that provides $1,000,000 life cover, $500,000 TPD cover and $300,000 trauma cover. If you make a claim on your TPD cover and receive the maximum benefit of $500,000, your life cover sum insured would be reduced to $500,000.
Claiming with separate policies
This differs from a standalone policy, which structures cover in such a way that each type of insurance is separated into discrete segments. So if you have a standalone policy and you make a claim on the TPD or trauma portion of your policy, this will not affect your life cover amount.
This effectively means that standalone policies offer a higher level of cover than bundled or linked policies, but they have higher premiums as a result.
What is a buy-back option?
The disadvantage of combining cover
The main drawback of combined or bundled life insurance is that claiming under one section of the policy reduces the benefit payable under other forms of cover. However, most insurers offer a way around this drawback in the form of cover buy-back options.
How does a buy-back option help?
You can purchase a buy-back option as an additional-cost extra on your bundled policy, although a few insurers offer it for no extra cost. If selected, this option ensures that your full life cover sum insured will be reinstated 12 months after your level of cover has been reduced by a successful TPD or trauma claim.
Can I immediately reinstate cover?
Your insurer may also offer double TPD or double trauma benefits. These allow you to immediately reinstate your full life insured amount after you have made a successful TPD or trauma claim.
Selecting an optional buy-back or double trauma/TPD benefits can help make sure that your loved ones will still have sufficient cover in place should you pass away. Otherwise, they may be stuck with a reduced level of life cover that doesn’t meet their financial needs, and if you’ve already suffered a serious illness or injury (which caused your previous claim), then you may have trouble purchasing a higher level of cover elsewhere.
Inside or outside super
Another option you will need to consider is whether you want to hold cover inside or outside of your superannuation. Life cover and TPD cover are both available through Australian superannuation funds, so you need to look at the benefits and disadvantages of holding cover through super before making any decisions.
For example, the ability to purchase cover with your pre-tax dollars makes buying a policy through super an affordable option. However, you will typically find that policies held outside super provide a higher level of cover. For example, TPD cover through super operates on an “any occupation” definition of disability, so you’ll need to satisfy stricter conditions in order for your claim to be paid.
Finding the right level of cover
If you want the comprehensive cover provided by taking out life, trauma and TPD insurance, it’s important to shop around and find the best value for money. You’ll need to carefully consider your personal circumstances and financial situation to work out how much cover you need under each type of life insurance policy.
Finder.com.au allows you to get quick and easy quotes for packaged life insurance from several leading insurers, so start comparing today. And if you need help deciding whether combined or standalone cover is right for you, ask your insurance adviser or financial planner for help.