While the first life insurance policies can be traced back hundreds of years, trauma insurance is a comparatively new entrant to the insurance market. Trauma insurance was first released in 1983 thanks to a South African surgeon, Dr Marius Barnard. The first policies were issued in Australia roughly ten years later.
Dr Barnard saw a need for financial assistance for patients who suffered a significant illness or accident. “When I went into private practice I could not help but notice that while many patients eventually fully recovered medically, they suffered severe financial problems. This was not because of the cost of the operation but because of the disruption to their lives and their loss of income,” Dr Barnard said.
Trauma insurance can fill this gap. Where total and permanent disablement (TPD) requires you to be unlikely to work again, and income protection pays if you are unable to work either temporarily or permanently, trauma payments require you to meet the definition of one of a list of specified diseases and injuries. So it’s not about the level or length of the disability; rather, it’s based on the diagnosis.
You may have heard trauma insurance referred to by another name, such as living, critical illness or crisis recovery. Trauma insurance can be complicated, with different policies covering different conditions, each with specific definitions.
Initially, just a handful of conditions were covered: cancer, heart attack, stroke and coronary artery surgery. This list has expanded and some policies cover up to 40 conditions including degenerative diseases like multiple sclerosis and Parkinson’s disease, paralysis, comas, loss of speech, deafness, chronic organ failure, major organ transplants, occupationally acquired HIV and even severe rheumatoid arthritis.
Because trauma insurance provides a payment based on diagnosis, rather than the level of impairment, working out the right sum insured is complicated. Consider that for cancer, a claim may be for a melanoma or may be for stage 3 lung cancer. Trauma provides you with a one-off lump sum so income and capital requirements need to be considered. Deciding the right amount of cover for you will involve a detailed discussion with your adviser around two key areas:
a) What will you need at the time of your illness/injury
b) What do you want your life to look like afterwards.
Firstly, your adviser may consider your income needs. As income protection only covers you for 75% of your income, many advisers will recommend that you top this up to 100% with trauma. The period you allow for is up to you, although a general rule of thumb is to allow at least two years.
You may also consider the other income in your household. If you were undergoing treatment for cancer, or diagnosed with motor neuron disease, would you need and/or prefer for your partner to take some time out of the workforce to look after you and your family?
Having this option to step out of the workforce to concentrate on your recovery can make an enormous difference.
Secondly, you and your adviser may consider the cost to have access to the best medical care available. You should consider the cost of treatment, potential travel and accommodation along with ongoing therapy. It can be difficult to quantify how much could be required. The cost of treatment and loss of productivity from cancer has been estimated at hundreds of thousands of dollars in a report for the Cancer Council of NSW.
When looking at medical costs, it isn’t just about treatment costs. Having access to quality rehabilitation services will assist your recovery. Whether this be physiotherapy, wellness services, counseling or alternative medicine, your plan needs to include an amount to fund your recovery.
Finally, it’s important to contemplate what changes you may like to make to your life. Will you still have the same drive to return to work? Your priorities could change, and planning for this can give you the ability to reduce your hours or cease work entirely. If you’re working towards retirement, you may wish to bring this date forward. Your adviser can discuss with you how these objectives can be achieved, such as through replacing income or reducing debt, so that less income is required.
While trauma is not well known, you are more likely to claim on this cover than life or TPD insurance. Spending time with your adviser to talk through your personal situation and plan for your individual needs is an important step in making sure you have the right level of cover in place.
Eleanor is a 44-year-old anaesthetist. She is married to Matt, an engineer, and they have two children aged eight and six.
She discussed with her adviser how difficult it was to consider what she would do if diagnosed with a serious disease or injury, but there were a number of scenarios she was sure of. Eleanor knew that if she had to go through treatment for cancer, she wanted Matt to be able to care for her and the children. She also said if she was diagnosed with a degenerative disease like multiple sclerosis, she would want to change her priorities, step away from work and focus on her well-being.
With her adviser, they put together a sum insured that would cover 25% of her income for two years (her income protection policy will provide the other 75% if she is off work). They also calculated lump sum for medical care and enough to pay off their mortgage. While paying off the mortgage was not a specified need, the ability to do this would allow either Matt or Eleanor to cease working. While the future is uncertain, talking through and understanding their protection plan has given Eleanor and Matt confidence that they’ve prepared for the unexpected.
For more information on trauma and risk insurance, contact your our specialist advisors here at Leenane Templeton.
1. Cost of Cancer in NSW by Access Economics http://www.cancercouncil.com.au/wp-content/uploads/2010/11/costofcancer_summary.pdf