Why there needs to be a mental health TPD middle ground

Last month, the Council of Australian Life Insurers (CALI) revealed that mental health is now the leading cause of total and permanent disability (TPD) claims, making up almost one in three claims paid.

Alongside insurers paying out more than $2.2 billion in retail mental health claims in 2024 – almost double the amount paid just five years ago – the latest CALI and KPMG Cause of Claims Results report found mental ill health is also driving one in five income protection claims, with payouts totalling $887 million last year alone.

CALI chief executive Christine Cupitt said Australia is “reaching a tipping point”.

“The entire safety net, not just life insurance, is under pressure,” Cupitt said.

According to Hayes & Co Insurance Services financial adviser Trish Gregory, the solution to the massive growth in mental health TPD claims needs to find a middle ground between wide-ranging mental health exclusions and an unsustainable level of TPD payouts.

“The great thing is that mental health is being talked about more. The problem is that the world seems to be getting more challenging, not less stressful. The biggest issue is not so much the income protection, it’s actually the total and permanent disability insurance,” Gregory told ifa.

“It tends to be the big issue, because the purpose of total and permanent disability insurance was you’re never working again in any job for which you have education, training and experience.

“When you think about it, if you’re never working again, you want a lump sum of money to pay off your home, to pay for medical expenses, because Medicare and private health do not cover everything when you’re totally and permanently disabled.”

Where it can become complicated, she explained, is that a “whole bunch” of clients that receive a mental health TPD payout will be able to go back to work at some point in the future.

“They’ve had a significant amount of time to retrain, to get their life in order, to just fully restart everything,” Gregory said.

“I think that the big issue with TPD is although these are legitimate claims, and of course they should be paid out, I don’t think the insurers had quite anticipated the level of mental health claims that there are now, because that wasn’t the intention when they wrote these policies forever ago.”

In many cases, she added, the response to this has been for insurers to become “quite harsh” in their use of mental health exclusions.

“If you’ve ever talked to your doctor and said, ‘Oh, I’m a bit tired, or I was sad, or I took a day off work for a mental health day’, or you’ve seen a psychologist who you’ve had medicine in the past sort of five years, you’re knocked out, you cannot claim on mental health,” Gregory said.

“Generally speaking, as a broad statement, they will put a mental health exclusion on your income protection and your total and permanent disability right from when you take out the policy.”

Looking at the situation just in terms of her own clients, Gregory detailed that around 70 per cent of policies have a mental health exclusion when they’re put in place.

“It’s definitely the majority rather than the minority.”

Importantly, she explained, insurers understand that the situation isn’t fair and they know people are doing the right thing, but they can only work with the information they have.

“If you have seen someone for a mental health issue, however mild, they’re going to exclude you. If there’s someone who hasn’t seen someone for a mental health episode, hasn’t seen a doctor, hasn’t seen GP, maybe being all stoic and hiding it deep down and getting insurance, the insurance can’t say that they don’t believe you and you’re not mentally OK,” Gregory added.

“They can only work with the information that they have. So, if someone gets the policy and then a year later, they have a mental health episode and they go on medication, that’s OK because they’re covered for mental illness, which can be the challenge.”

One way to solve the issue that could work for both clients and insurers is having a specific mental health TPD policy, she said, which would operate differently to a physical TPD claim and provide some level of lump sum and ongoing care “dripped out over a number of years”.

“If someone has the mortgage paid off and they’ve got their income protection coming in, maybe they have the space to recover and don’t actually need the ongoing care costs, because they might go back to work in two years or three years or five years,” Gregory said.

“The key thing is, how do we make sure that the insurers stay solvent so they can keep paying out claims, and they don’t have to raise the insurance rates ridiculously high?”

Ultimately, if the only solution for advisers is to jack up the rates for coverage, a whole host of clients will cancel or reduce their coverage, but it won’t be the people who are most likely to claim.

“The people who can’t cancel because they have a mental illness, but their coverage doesn’t have a mental health exclusion on it, those people are sticking to their policies and they’re more likely to claim,” she said.

“Then the pool of insured people is smaller. They’re getting less money. They need to increase rates. It’s a cycle.

“I wish it wasn’t but [premium increases] are needed for these companies to keep paying out the claims for people who need them.”