Understanding Trauma Insurance: A Key to Protecting Your Wealth
As financial planners, our top priority is helping clients safeguard their financial future. One of the most significant challenges clients face is the potential for a sudden illness or medical condition to disrupt their wealth accumulation strategies. That’s where trauma insurance comes in.
Trauma insurance, also known as critical illness insurance, offers financial protection if you’re diagnosed with certain life-changing medical conditions. It can be an essential part of a comprehensive financial plan, particularly when paired with other types of personal risk insurance.
It is important to understand what trauma insurance is, how it works, and how it could fit into your overall wealth protection strategy.
What is Trauma Insurance?
Trauma insurance provides a lump sum payment if you’re diagnosed with a specific medical condition or experience a severe health event. The conditions covered typically include cancer, heart attacks, strokes, and other serious illnesses. Once diagnosed with a covered condition, the lump sum payment is designed to help you cover medical expenses, make necessary lifestyle adjustments, or simply relieve the financial stress of not being able to work.
Unlike traditional life insurance, trauma insurance is often not included within superannuation. This means it’s typically purchased as a standalone policy or as an addition to life or total and permanent disability (TPD) insurance.
Who Can Apply for Trauma Insurance?
Trauma insurance is generally available to people under the age of 60, though some insurers may offer coverage to older individuals with certain conditions. It’s always wise to consult with your financial planner to confirm the specific terms of any policy you’re considering.
What Does Trauma Insurance Cover?
Trauma insurance typically covers a range of severe medical conditions, including:
- Cancer
- Heart attack
- Stroke
- Kidney failure
- Alzheimer’s disease
- Parkinson’s disease
- Major head trauma
- Severe burns
- Organ transplant
This list is not exhaustive, and the exact conditions covered can vary between insurers. Some insurers also provide different definitions or additional conditions, so it’s critical to review policy details thoroughly before committing.
It’s also worth noting that some events are not covered. These may include death within 30 days of the event, deliberate self-inflicted harm, or injuries arising from acts of war. Note that most policies have a waiting period. This means the policy must be active for a certain period before you can make a claim.
How Premiums Work for Trauma Insurance
Trauma insurance premiums can be structured in one of two ways: stepped or level.
- Stepped premiums increase as you age. While these start lower, they rise significantly over time, reflecting the increased risk as you get older.
- Level premiums, conversely, are higher at the start but remain relatively stable, adjusting only for inflation over the life of the policy. Level premiums may seem expensive initially, but offer greater predictability and can be more cost-effective in the long term.
The Tax Implications of Trauma Insurance
Trauma insurance premiums are generally not tax-deductible when paid in a personal context, but the payout you receive from a claim is usually tax-free. This tax treatment is advantageous, as it ensures that the entire lump sum is available to meet your financial needs following a critical illness.
Why You Might Need Trauma Insurance: A Real-Life Example
Consider Jenny, a 36-year-old administration assistant who was suddenly diagnosed with ovarian cancer. Her diagnosis forced her to take a leave of absence from work to undergo treatment. Fortunately, Jenny had taken out a trauma insurance policy after a consultation with her financial adviser. Her policy provided her with a $250,000 lump sum payout, which she used to –
- pay off part of her mortgage,
- cover some medical expenses, and
- take a year off from work to focus on her recovery.
Without trauma insurance, Jenny would have faced the added stress of financial instability during a time when her sole focus should have been on her health. Instead, she was able to recover without the burden of financial worries.
Securing the Right Trauma Insurance for Your Needs
As financial planners, we recommend reviewing your insurance needs regularly. This is especially important when it comes to trauma insurance because the specific coverage options and policy definitions can vary significantly between insurers. The right policy will depend on your medical history, family situation, and financial goals.
Trauma insurance can be a valuable addition to your wealth protection strategy. It offers peace of mind that you’ll have financial support in the event of a critical illness. Your coverage is comprehensive and tailored to your circumstances. To achieve this, it’s essential to consult with a financial adviser who can help you navigate the options.
At Continuum Financial Planners, we provide ongoing tailored advice to ensure that your insurance continues to meet your evolving needs. If you’d like to explore how trauma insurance can protect your financial future, feel free to contact us on 07-3421-3456 or, at your convenience, through our website Book A Meeting 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.
This article was originally posted in February 2010. We have occasionally refreshed/ updated it, most recently in September 2024.)
