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Trauma Insurance

If you suffer a stroke, have a heart attack, are diagnosed with cancer or one of up to 50 conditions you have suffered a Trauma and are likely to face heavy out of pocket medical bills and be unable to work. Your partner may need to stop work to look after you. Who pays the mortgage or rent, medical bills and all the other living costs?

If you think about it you will probably know someone who has had a traumatic illness. Would their recovery have been much less stressful if they could afford the best treatment and didn’t have to worry about finances?

Trauma insurance pays out a lump sum on diagnosis of a traumatic event (critical illness). That’s on diagnosis, the time you need the financial reassurance most, not after your specialist gives you the prognosis and the battle starts.

Trauma Insurance

Trauma insurance provides a lump sum benefit if the person insured suffers one of a list of serious illnesses. The 3 main conditions leading to claim are heart attack, stroke and cancer with cancer being far and away the biggest single cause of claim.

These are not the only conditions covered, each insurer offers comprehensive policies with up to around 50 conditions listed as well as budget cover with a limited range of illnesses listed

Trauma insurance is also known as Recovery Cash or Critical Illness coverage. The key distinction between this and life or TPD insurance is that the benefit is paid out a short time after diagnosis. The lump sum payment is designed to cushion the financial impact of being unable to work while undertaking invasive treatment and coping with the extra medical bills which are likely to result.

As the purpose of the policy is to facilitate recovery without financial stress, the insured should be able to return to work. Consequently coverage levels do not have to be as high as for Life or TPD insurance.

Bundled Policy

Trauma insurance is often taken as a “rider benefit” to term life insurance. In this instance, the covers are bundled together in one policy which pays out on the insured suffering the first event. The facility exists to pay an additional premium which will allow you to ‘buy back’ your life cover after a Trauma claim has been paid.

Stand Alone Policy

Suffering a traumatic illness does not trigger a condition of release for superannuation funds. In addition trauma premiums are not tax deductible to the trustee of a superannuation fund. It is now a breach of superannuation regulations to purchase trauma cover in a superannuation fund. Should you wish to hold term life and TPD cover via superannuation trauma insurance should be considered as a stand alone policy owned personally. It is also possible to have a Trauma insurance policy owned and paid for personally but linked to a life or TPD insurance policy held via superannuation.

Entry Age/ Expiry

A new Trauma policy is normally available to persons between the ages of 16 to 64.

Cover is “guaranteed renewable”. Once the insurer has accepted the client they cannot cancel the cover unless the client stops paying premiums.

As long as premiums continue to be paid cover can stay in place until the insured’s 65th birthday.  Some insurers may extend this to age 70 but may impose a restriction on the conditions covered.

Level of cover

This is the amount the client applies for. The minimum is normally $50,000 or the amount related to a minimum premium, for instance $220 per annum. The maximum cover is normally limited to $2 million.

Premium Options

Premiums can either be stepped or level.

Stepped premiums increase annually on each policy anniversary as the insured gets older.

Level premiums remain constant (apart from increase in cover due to CPI ) for the life of  the policy until the insured reaches age 65. Most insurers have level premiums revert to stepped when the insured reaches age 65.

Level premiums are more expensive than stepped premiums. As stepped premiums increase each year there is a ‘crossover point’ where the stepped premium becomes more expensive than the level. This can be between 5 and 10 years and is client specific. Each client’s circumstances and needs must be considered when deciding between stepped and level premiums.

If you are considering applying for Trauma insurance please check the Cancer Council website to see the percentage chances of being diagnosed with cancer by the time you attain age 70 (when the policy expires) Once the chance of suffering from cancer exceeds 50% it becomes a probability rather than a possibility and therefore ensuring you can afford to keep the policy when you are older (level premiums)  suddenly becomes more important.

Child Trauma

As an optional extra to an adult’s trauma policy, cover can be put in place for dependant children. This is limited in amount to a maximum of $100,000 for most insurers. The reasoning behind this cover is that a parent may be unable to work and will face extra medical costs if a child suffers a traumatic illness.

Who is Trauma Cover appropriate for

Trauma cover is essential for any person who has family or business associates who have a financial dependence on them or for single people whose financial resources would be stretched if they had to cope with a traumatic illness.

As the policy pays out on diagnosis and there is an expectation of recovery, when compared to life or TPD, this coverage is of most direct benefit to the insured person.

In a personal context Trauma insurance can be used to:-

  • Pay off or reduce a mortgage or other debt on the diagnosis of traumatic illness of a breadwinner.
  • Pay for high level medical treatment, perhaps not subsidised by Medicare.
  • Pay for out of pocket medical expenses.
  • Provide a financial buffer to cope with the waiting period and 25% income reduction associated with an income protection claim
  • Pay off or reduce a mortgage on the diagnosis of traumatic illness of a homemaker to allow the breadwinner to be available as a support through treatment, to care for children and assume home duties.

In a business context Trauma insurance can be used to:-

  • Fund business succession in Buy/Sell agreements
  • Replace lost revenue on the traumatic illness of a ‘key person’ to the business
  • Payout or reduce business debt
  • Protect personal assets supporting business lending facilities by way of Guarantees
  • Protect the ability of the business to distribute to a principal who is unable to work

Policy Ownership

Policy ownership is considered for each client’s circumstances and needs. If not owned by the insured or a defined relative, the payment of a trauma claim is a CGT event. Therefore Trauma policies are normally self owned

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