What is Trauma Insurance – and what protection does it provide?
Trauma insurance is a life insurance product that provides a claim benefit on the diagnosis of certain, prescribed/ defined conditions. Trauma insurance protection comes in the form of a financial benefit payment on the occurrence of eligible ‘medical’ conditions, or a policy-defined event, which may render the policyholder incapable of working for a period of time. It is paid as a lump sum in settlement of a valid claim – in some cases, on diagnosis of the insured ‘event’. Trauma insurance (also commonly known as critical illness insurance) is available as either a component of a life insurance policy or as a separate product. Unlike life insurance however, trauma insurance is not normally available within a superannuation fund.
Who can apply for Trauma Insurance protection?
Although there are some rare exceptions, trauma insurance policies are usually only available to people who commence the policy before age 60 and usually cease at age 75. The availability of trauma insurance protection otherwise will be subject to acceptance of a formal application in which full disclosure of any existing conditions has been made.
NOTE: The age restriction may change over time and should be checked with your financial adviser to confirm whether cover may be available beyond these parameters as insurers update their offerings.
How much protection can be bought with Trauma Insurance?
Trauma insurance is normally limited to cover of $1 million, though combined with TPD insurance, this 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.
What ‘events’ give rise to a claim under Trauma Insurance policies?
Trauma insurance covers a range of medical conditions and events: whilst not exhaustive, the following major events will be covered by most insurers –
|Alzheimer’s disease||Blindness||Cancer||Chronic lung disease|
|Coma||Deafness||Heart attack||Kidney failure|
|Loss of limbs||Major head trauma||Organ transplant||Multiple sclerosis|
|Paraplegia||Parkinson’s disease||Severe burns||Stroke|
[Note: different insurers provide cover for slightly different ranges of events – and sometimes add differentiating definitions to their policy conditions.]
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 waiting period. That is, the policy must have been in place for the prescribed number of days before a claim can be made.
What Premium options are available for Trauma Insurance?
Most insurers will index the amount insured, usually based on the CPI. Consequently, premiums will increase – as they will also increase under a stepped premium policy as the insured ages (increasing the risk factor for the insured events occurring).
Premiums may alternatively be level, set at a base cost depending on the age of the insured at the commencement of the ‘level premium’. Level premiums do increase with CPI, but in effect remain the same throughout the life of the insured.
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.
What is the taxation treatment of premium costs; and claim receipts, from Trauma Insurance policies?
Trauma premiums paid in a private/domestic context or by self-employed people are not normally tax deductible. However, the proceeds of the policy which are paid to the insured or his/her spouse will not be subject to income tax, nor CGT. [Note however, that if the policy has been transferred from the original beneficial owner for consideration, the CGT exemption will not apply to a claim payment.]
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.
Consider the following scenario:
Jenny was 36 years of age, employed as a clerk, when she developed severe abdominal pain. She went to her doctor who recommended her having an ultrasound and undergo a laparoscopic procedure. When the results came back it was revealed that there was a presence of cancer in her right ovary. Due to this Jenny was unable to work and immediately started treatment.
The questions had to be asked – would Jenny be able to manage the stress if she had to return to work to pay all her bills and living expenses?
What Jenny needed was Trauma Insurance, which would help her pay for things such as:
- Specialised medical attention
- Modifications to the home if needed
- The relief from financial stress when recuperating
- Even a holiday to a quiet place at the end of her recovery.
Fortunately, after a review with her adviser some years earlier, Jenny had taken out a trauma policy with an amount of $200,000 which as paid as a lump sum after her diagnosis. With this money Jenny was able to pay off the mortgage on her apartment, cover all her medical expenses and leave more than enough to take a 12 months sabbatical from her work as she concentrated on her treatment and recuperating from the ordeal.
How to ensure you secure the right Trauma Insurance protection…
To discover the benefits of trauma insurance protection in your particular circumstances – and the policies offered by which insurer that would be most appropriate for you, contact Continuum Financial Planners Pty Ltd and arrange an appointment with one of our experienced advisers: call 07-34213456, or use the website Contact Us facility.
Note: the insurance service at Continuum Financial Planners Pty Ltd incorporates advice, followed by 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 – and remains, 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 changes have been made to update information and to reformat for use on this site. Originally posted in February 2010, it has been reviewed and updated occasionally, most recently in April, 2018.)