The real cost of underinsurance in Australia: what a TPD payout actually needs to cover

Most people treat a total and permanent disability (TPD) payout as the finish line. In reality, it’s the starting line. Underinsurance in Australia means many families only discover the gap between what they expected and what they actually have at the exact moment they can least afford it.

The real question isn’t how much insurance cover you hold. It’s what your life will actually cost if illness or injury means you become unable to work in your usual occupation, or live independently at all.

Before I moved into financial advice, I spent over 30 years across trades and industry, then co-founded and ran a national, award-winning in-home aged care and disability support provider here in the Hunter. I’ve sat at kitchen tables with families working out what care actually costs, week to week. That experience taught me something the spreadsheets don’t: most people insure a number, not the real cost of living with a permanent disability.

Why underinsurance in Australia is often invisible until you claim

Most working Australians hold TPD insurance through their super fund by default, which feels safe but can be quietly misleading. A 2022 report commissioned by the Financial Services Council found that around one million Australians are underinsured for death and TPD cover, with a further 3.4 million underinsured for income protection insurance.

Default cover inside your super fund is often expressed in units, and the dollar value of those units can shrink as you age or as fund formulas change. Reforms such as Protecting Your Super also trimmed group insurance policies across the board, often without a clear heads-up to members. Several factors determine what your default cover is actually worth when you need it, and most people never check.

Most people don’t realise how much their cover has eroded until claim time, when it’s too late to fix. In our own reviews of default super TPD cover, it’s common to find a client’s actual cover has fallen well below what they believed they held. We’ve seen cases where someone expected $500,000 in coverage, but the actual figure at claim time was closer to $36,000.

The gap between the cover people think they have and the cover they actually have is where families get hurt.

The iceberg most people don’t see: what care really costs

Most people don’t set aside enough money for long-term care because they’ve never priced it out. Think of a TPD event like an iceberg. The lump sum you insure for is the tip you can see above the waterline: the mortgage and the immediate bills.

The real mass sits below the surface, years or even decades of care, equipment, home modifications and lost family income, and that’s the part that sinks financial plans. Based on what our team sees supporting families locally, here’s roughly what different levels of care can cost each year. These figures cover labour alone, before equipment, home modifications, transport or coordination are added.

Level of care	Typical cost per year
Basic support (a few hours a week)	$5,000 to $15,000
Moderate care (daily assistance)	$30,000 to $80,000
High care or complex needs	$100,000 to $250,000+
24/7 care (multiple carers, rostered shifts)	Can exceed $300,000

Five things people almost always miss:

1. Duration, not just cost. Care isn’t a one-year event. It can run for an extended period, ten, twenty or even thirty years, and a cost that looks manageable annually becomes significant over a lifetime.
2. The funding gap. Government support rarely covers the true cost, and not everyone qualifies. Many people fall short of eligibility or still face large out-of-pocket medical expenses and living expenses.
3. Informal care breaks down. Families often assume they’ll step in, but carer burnout is real and unpaid support is rarely sustainable for decades.
4. Coordination has a cost. Someone still has to organise carers, manage rosters and deal with providers, and that work carries a real financial and emotional cost.
5. Care inflation. Care costs tend to rise faster than general inflation, driven by workforce pressures. Today’s estimate can quickly become tomorrow’s underestimate.

Won’t the NDIS cover it?

This is the biggest misconception I come across. Many people assume the National Disability Insurance Scheme will pick up most, if not all, of the cost of long-term care. In practice, it rarely stretches that far.

The NDIS has strict eligibility criteria, only funds supports it considers reasonable and necessary, and is subject to ongoing policy change following the May 2026 Federal Budget reforms. Recent NDIS quarterly data show that scheme payments per participant fall well short of what high-level, around-the-clock care can cost, which can run to $300,000 or more a year for some families. If you don’t qualify for the scheme, or your plan doesn’t stretch that far, there’s nothing behind it.

Relying on the NDIS as your only plan isn’t just optimistic. For families who don’t qualify or whose plan falls short, this can lead to serious underinsurance and some very difficult decisions about the family home, savings, and how bills are actually paid.

A realistic, illustrative example: what happens when the cover falls short

Image: Magnific

Consider this example, the kind of situation our team sees often: Dave (not a real client) is a 52-year-old diesel fitter from Maitland: fit and hardworking, with two kids under ten, a mortgage, a car loan, and a wife, Sarah, who works part-time in retail. 

A serious spinal injury, a permanent injury behind many TPD claims in Australia, ended his career overnight.

Dave held default TPD cover through his super account and assumed it was around $300,000. When his policy is reviewed at claim time, unit-based erosion results in an actual figure closer to $110,000. Here’s what that TPD payout has to stretch to cover.

What the money has to do	What Dave assumed	Real cost
Clear the remaining mortgage	Covered	$280,000
Home modifications (ramp, bathroom)	Not budgeted	$45,000
Equipment (bed, mobility aids)	Not budgeted	$25,000
Ongoing care and support (per year)	Not budgeted	$40,000+ a year
Replacing lost income with retirement	Not budgeted	$1 million+
TPD cover actually available		$110,000

The cheque clears part of the mortgage and runs out. Sarah cuts her hours to become Dave’s primary carer, so the family loses her income too, right as costs are climbing, including the kids’ education and everyday living expenses. Within eighteen months, they’re drawing down savings just to stay afloat.

With advice a few years earlier, Dave’s cover could have been restructured to reflect what his life would actually cost, rather than what a default formula happened to produce. Same injury, a very different outcome: the home was retained, care was funded, and Sarah was able to keep working.

What if you already have a health condition?

Image: Magnific

One of the most common worries we hear is that a past illness or injury will rule someone out of cover entirely. It’s a fair concern, and it stops plenty of people from ever finding out where they actually stand.

The reality is more nuanced. Insurers look at applications individually, not just the diagnosis on paper. A manageable condition, something like a healed injury or a well-controlled illness, doesn’t absolutely rule you out of appropriate insurance coverage.

Sometimes it means a loading on your premiums, more exclusions on one specific condition, or a different structure altogether, rather than no cover at all. In some cases, being upfront and well-prepared can even lead to lower premiums than people expect.

This matters most for people carrying a mortgage or other debts, supporting a family, or relying on their own income and job to keep everything running, including sole traders, business owners and high-income professionals. The only way to know the right amount of cover for your specific circumstances is to have someone assess them properly, rather than assuming the worst and going without.

So, is TPD insurance worth it?

The data backs up what we see in practice. APRA and ASIC’s most recent life insurance claims and disputes statistics, covering the twelve months to 31 December 2025, show that individual TPD claims arranged through a financial adviser were paid out at 70%, compared with 53% for TPD claims taken out without advice.

Working with a financial adviser doesn’t guarantee a claim will be paid. It does mean a policy structured around your real circumstances, the amount insured actually matching what your life would cost, and support from someone who understands the claims process when it matters most.

Whether the trigger is a permanent injury, a serious illness such as cancer or a heart attack, or an accident, the value of having the right cover in place before it happens is the same: it buys your family time and options, instead of forcing decisions under pressure.

Our approach: insurance that protects a life, not a line item

At Elliot Watson Financial Planning, we don’t start with the numbers. Reducing underinsurance in Australia starts with an honest look at what your specific life would cost, not a default figure, which means asking the questions that matter.

• Could you stay in your own home, rather than move into a facility?
• Would your partner need to stop working to care for you, and how would you replace that income?
• How would decades of care, equipment and modifications actually get funded?
• What lifestyle, choice and dignity do you want to preserve, whatever happens?

We stress-test scenarios beyond the average outcome, model care costs realistically, and factor in inflation and duration so your cover reflects real life rather than a brochure figure. It’s tailored, needs-based advice covering life insurance and income protection where they’re needed, not a generic level applied to everyone. You can get a rough sense of the numbers yourself using our insurance and financial planning calculators before your first chat with us.

The problem	How tailored advice helps
Default super TPD quietly erodes over time	Regular reviews catch the gap before you need to claim
People insure income, not the real cost of care	Cover is built around lifetime care, not just a mortgage
Assuming the NDIS or family will cover everything	A realistic funding gap is modelled and planned for
Health history holds people back from checking their cover	Individual assessment, not assumptions, decides what’s available
Unadvised TPD claims are paid out less often	Better-structured cover and claims support lift the odds

Whether you’re reviewing your TPD cover before you ever need it, or a health condition has made you put it off, our team offers specialist TPD insurance advice grounded in real experience, not just theory. 

If you’ve recently received a payout and aren’t sure what to do with it, our guide on what to do after a lump sum payout is a good place to start. If aged care or disability support is part of the picture for your family, our aged care financial advice team can help there, too.

We work with families across Newcastle, Maitland, Singleton, the Central Coast and the Hunter Valley to protect independence, dignity and financial security, whatever life brings. Book a no-obligation chat with our team today. The best time to check your cover was years ago. The second-best time is now.

Disclaimer:

The information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information, you should consider its appropriateness regarding your objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser.

The views expressed in this publication are solely those of the author; they are not reflective or indicative of the licensee’s position and are not to be attributed to the licensee. They cannot be reproduced in any form without the author’s express written consent. Elliot Watson Financial Planning Pty Ltd and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.

Article written by Provisional Financial Adviser, Geoff McQueen