Trauma (Critical Illness) Insurance

Trauma insurance offers cover in the event of a major one off event which may render a person unable to return to work for a period of time.

Trauma insurance, (also known as dread disease insurance) is available as either a component of a life insurance policy or as a separate product. Trauma insurance is not normally available within a superannuation fund.

Although there are some rare exceptions, trauma insurance policies are usually only available to people who commence the policy before age 55 and usually cease at age 65.

Trauma insurance is normally limited to $1 million, though combined with TPD insurance, cover may be extended up to $3 million.

Some policies offer a buy-back feature. This allows the insured to take out life insurance cover after a trauma subject to qualification conditions. This is useful as many people who have suffered a health trauma may have difficulty qualifying for insurance at all

Trauma insurance covers major events including:

Certain events will be excluded including:

• death within 30 days of the event;
• deliberate self inflicted harm; and
• injuries arising from an act of war.

Cover for these events are usually subject to a 90 day waiting period. That is, the policy must have been in place for 90 days before a claim can be made. Premiums may be stepped or level and will reflect the insurance risk associated with age.

Premiums

Most insurers will index the amount insured, usually based on the CPI. Consequently, premiums will increase also.

Premiums may be stepped or level and will reflect the insurance risk associated with age.

Level premiums increase with CPI, but in effect remain the same throughout the life of the insured. Stepped premiums increase as the insured ages. Level premiums are higher than stepped premiums when the insured is younger, but as the insured ages, the stepped premiums will increase to an amount substantially higher than the level premiums.

Taxation treatment

Trauma premiums paid in a private/domestic context or by self-employed people are not normally deductible (see Tax Determination TD 95/41). However, the proceeds of the policy which are paid to the insured or his/her spouse will not be subject to CGT (see Tax Determination TD 95/43). Note that if the policy has been transferred from the original beneficial owner for consideration, the CGT exemption does not apply.

The tax treatment in a business context is more complicated. For instance, if an employer owns the policy and pays the premium in respect of an employee, the premium will be deductible to the employer but FBT will also be applicable. The proceeds will be assessable and if the employer makes payments to an invalid employee, a deduction will be allowable to the employer.

Please consider the following Case Study:

To discover how this type of cover would serve your particular needs, contact your Continuum adviser using the contact us facility.

Note: the insurance service at Continuum Financial Planners incorporates Insurance Reviews, followed by advice and annual reviews thereafter. Using this process our recommendations ensure that your insurance protection is adequate for all events, giving you peace of mind that your wealth protection strategy is appropriate for the standard of living you and your family expect.

We acknowledge the substantive input to this article from the Deutsche Bank Desk Caddie facility: a number of minor changes have been made to tailor it to the needs of the Continuum Financial Planners website.