When developing a comprehensive financial plan, it’s essential to consider protection against major life events that could significantly impact your financial well-being. This is where personal insurances come in, and one aspect of a comprehensive protection package that is often overlooked is Trauma insurance.
Trauma insurance, commonly known as Critical Illness, provides a lump sum payment if you’re diagnosed with a specific serious illness or injury. This benefit allows you to focus on recovery without the added stress of financial pressures.
Despite its importance, Trauma insurance is often neglected. Many people insure their material possessions but fail to protect themselves against the financial impact of a serious illness or injury, which can have a much greater effect on their financial stability.
In this article, we will explore Trauma insurance to help you understand what it is and how it works.
What is Trauma insurance?
Trauma insurance pays a lump sum if you’re diagnosed with a specified serious illness or injury, such as cancer, heart attack or stroke. Unlike TPD insurance, you don’t need to be permanently unable to work to claim – the diagnosis itself is enough to trigger a payout.
The primary components of a Trauma insurance policy are the sum insured, the covered conditions, and the cost. Let’s examine each of these in detail.
Sum insured
The sum insured is the amount that will be paid out if you’re diagnosed with a covered condition. The amount of cover you need will depend on your Insurance Needs Analysis and is individual to everyone’s specific circumstances. We have a free Insurance Needs Analysis calculator you can use.
When considering your Insurance Needs Analysis, you should consider the following:
- Medical bills to be paid;
- Rehabilitation expenses;
- Income to be replaced while your off work; and
- Expenses to be covered.
You can offset the amount of cover you need by the existing assets you have, and other insurance policies. For instance, if you have Income Protection, you may not need to allow for income to be replaced if you are off work due to a Trauma event as your Income Protection should pay a monthly benefit until you return to work (or reach the end of the benefit period).
Covered conditions
The list of covered conditions is a crucial aspect of a Trauma insurance policy. Most policies cover around 40-50 conditions, but some may cover much more. Common covered conditions include:
- Cancer
- Heart attack
- Stroke
- Coronary artery bypass surgery
- Major organ transplant
- Paralysis
- Severe burns
- Major head trauma
It’s important to carefully review the definitions of these conditions in the policy document, as they can vary between insurers and may be quite specific.
Structuring your Trauma Insurance
Unlike other types of personal insurance, Trauma insurance cannot be held inside superannuation due to regulatory restrictions. This means premiums must be paid from your after-tax income. While this impacts your cashflow, it also means that any benefits paid are generally tax-free.
How much does cover cost?
The cost of Trauma insurance varies based on factors including age, gender, health status, smoking status, and the amount of cover.
For instance, a young, healthy non-smoker will generally pay less than an older smoker. This is because the insurer assesses the likelihood of a claim based on these factors.
Unlike TPD and Income Protection insurance, occupation usually plays a less significant role in Trauma insurance pricing, as the covered conditions can affect people regardless of their job.
Stepped vs level premium
Like other types of personal insurance, Trauma insurance usually offers a choice between stepped and level premiums.
Stepped premiums start lower but increase as you age, reflecting the increased risk. Level premiums start higher but remain more stable over time, only increasing with inflation or changes to the insurer’s rates.
The choice between stepped and level depends on how long you expect to need coverage. If you only need coverage for a relatively short period, stepped premiums might work out cheaper overall. For longer-term coverage, level premiums could be more cost-effective in the long run.
As the chances of suffering a specified Trauma event increase significantly with age, so do your premiums under a stepped policy. Given this, Trauma insurance is one of the few covers that we would consider a level premium for.
Applying for cover
Trauma insurance is typically available as a retail policy. These policies are medically underwritten at the time of application, meaning you’ll need to provide detailed information about your health and lifestyle. While this process takes time, it provides greater certainty at claim time because any pre-existing conditions have already been assessed.
To get a retail policy, consider speaking with a Financial Adviser. Advisers have access to a wide range of insurance products and can provide guidance on how much cover you need and how to structure it effectively. If you would like our assistance, please visit Personal Insurance where you can get the process started.
The underwriting process
The underwriting process for Trauma insurance involves answering questions about your medical history and possibly undergoing medical tests or providing reports from your doctor.
If you have pre-existing medical conditions, the insurer may apply a loading (increased premium) or exclusion (specific conditions that aren’t covered) to your policy. For example, if you have previously had a cancer scare, the insurer might exclude cancer related conditions.
It’s generally easier to obtain comprehensive cover when you’re younger and healthier, before developing any significant health issues. This is why we recommend considering Trauma insurance early in your career.
Linking Trauma to Life Insurance
Where you have a Life Insurance policy in place, you may be able to link the Trauma cover to Life Insurance, reducing the overall cost of your protection package.
Under a linked arrangement, the level of Trauma cover cannot exceed that of Life cover. In addition, if you make a claim under Trauma, the level of Life cover will be reduced by the amount of Trauma claim. Retail policies have the option to include a Life cover buy back option, which will allow you to reinstate the level of Life cover in the event of a Trauma claim.
The Guided Investor approach
Trauma insurance is a crucial part of a comprehensive financial plan. We include personal insurances in the ‘financial housekeeping’ of Phase 1 of Wealth Creation, as part of establishing your financial foundation. It is an essential part of your overall protection package alongside Life, TPD and Income Protection.
