Recommending trauma insurance to clients

Traumainsurance grew out of the early 1980s critical illness insurance developed in South Africa. It has now spread across the globe and in Australia is commonly known as trauma insurance, but is also referred to as crisis, critical illness and recovery insurance.

Although companies offer cover for up to 30 conditions or so, the majority of claims arise from cancer, stroke, heart attack and bypass surgery. These are often referred to as the ‘big four’ conditions.

The most significant cause of claim is cancer, accounting for almost 60 per cent of cases.

In Australia, the chance of developing cancer is one in three for males, and one in four for females.

However, medical advances are helping us to survive major illnesses. Around 50 per cent of cancer sufferers will survive more than five years.

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This means a consideration of the financial burden on families and businesses and how trauma insurance can alleviate this problem.

There are three main purposes of trauma cover.

• Medical and lifestyle expenses (capital) — such as specialist medical fees, costs for a carer, or costs to renovate the home due to the customer’s disability.

• Recovery period (income) — which may be one or two years’ worth of income. Why only one or two years? The idea of trauma cover is not to replace income protection insurance, but to complement it. For instance, the customer might be able to work, but would prefer to rest and recuperate. The trauma cover provides more options for the customer to make a more complete recovery.

• Debt reduction (capital) — the customer may seek additional security in covering existing debts to some extent, or allowing for other contingencies. Their recovery from illness may improve greatly if their debt is reduced or retired altogether.

Trauma insurance fills a gap not quite covered by other forms of insurance.

When it comes to total and permanent disablement insurance, the usual period before claim is at least six months. This can mean quite a delay before funds are available to help with medical or lifestyle adjustment costs.

Income protection may allow for lost income when a customer can’t work, but it won’t necessarily cover the extra costs that may arise. And to receive a benefit, the customer must be unable to work. As there is no such requirement for payment of a trauma claim, customers have greater flexibility.

For instance, a customer may have suffered a heart attack, and be able to return to work. Trauma insurance provides customers with that choice. It gives them the opportunity for a recovery period, and income to allow for an adjustment to their lifestyle — maybe slowing down a little.

There is more than one way of calculating sums insured for trauma. Planners need to concentrate on the purpose of the cover.

Like life insurance, customers still have both capital and income needs. But should the capital needs include debts? Or are they only concerned with contingency planning? Do they want to cover a short period of lost income, or possibly ongoing income needs?

The following are common alternatives used in calculating the cover needed:

• Amount similar to term life calculation (most common for business purpose cover); or

• Percentage of debt (perhaps to clear the mortgage or car loan) plus contingencies; or

• Multiple of annual earnings (normally one or two times) plus contingencies.

It is also reasonable to fund based on a combination of these.

For instance, a customer may wish to clear personal debts (but allow the mortgage to remain), allow for two years income loss, and also a small amount for contingencies. Contingencies could include specialist medical needs, home care costs, or even home renovations needed due to the disability suffered.