The terms “trauma insurance” and “critical illness insurance” may sound like two distinct insurance products, but in Australia, these terms mean the same insurance product and are often used interchangeably.
However, insurance providers often define the terms of their policies in their own way. No two insurance offerings are exactly the same, so it’s always best to carefully read a specific insurance policy’s product disclosure statement, do your research, and shop around first.
In this article, we take a closer look into critical illness and trauma insurance, explore their common features, and compare them with related insurance products to help you choose the best one for your needs.
Critical Illness Insurance and Trauma Insurance Compared
Australian insurers usually offer either critical illness insurance or trauma insurance, and it is generally understood that they refer to the same type of insurance product, unless the insurer states otherwise.
It’s also important to note that after July 2014, superannuation funds stopped offering this type of insurance. If you had trauma insurance as part of your super fund before this date, you may want to check with your super fund for confirmation.
What is Critical Illness Insurance?
The definition of a “critical illness” when referring to critical illness insurance in Australia varies from insurer to insurer, but there are some commonalities. Critical illnesses are typically defined as serious illnesses that can have a significant impact on your health, well-being, and ability to work. These are illnesses that usually require major surgery, hospitalisation, and/or ongoing treatment.
Critical illness insurance is a policy that pays a direct lump-sum benefit that you can spend to pay for expenses not covered by other insurance (for example private health insurance), in the event of a serious medical condition.
What is Trauma Insurance?
Trauma insurance is a type of insurance that pays out a lump sum if you are diagnosed with a serious illness or injury. The term “trauma” in trauma insurance is used in the medical sense (a serious illness or injury that can have a major impact on your life), and the specific definition varies from insurer to insurer.
However, trauma insurance policies in Australia cover a similar (if not the same) range of illnesses and injuries as critical illness insurance policies. Trauma insurance is also sometimes referred to as “recovery insurance”.
Features and Benefits
Critical illness or trauma insurance pays you a lump sum if you suffer from a critical illness or injury specified in your policy. You can use this amount to cover your medical costs, living expenses when you are unable to work, therapy and nursing care costs, modification of your home, and even debt repayment. Let’s go into each aspect in detail:
1. Lump-Sum Payout
A defining feature of critical illness or trauma insurance is the lump-sum payout it offers. If you are diagnosed with a specified critical illness or sustain a covered injury, the insurance policy provides you with a full or partial one-time payment based on your sum insured. This lump-sum amount is often tax-free and can be a financial lifeline during a challenging time.
2. Coverage for Critical Illnesses and Injuries
These policies usually cover a range of common critical illnesses and injuries as specified in your policy document, such as cancer, heart attacks, strokes, or major organ failures. Some policies may extend coverage to additional conditions depending on the insurer and the policy terms.
3. Versatile Use of Funds
- You have the flexibility to use the lump-sum payout in ways that best address your immediate and long-term needs. This can include:
- Medical Costs: Cover medical expenses such as surgeries, hospital stays, medications, and specialist consultations.
- Living Expenses: Replace lost income if you are unable to work due to illness or injury, to help you maintain your standard of living and afford daily expenses like groceries, utility bills, and rent or mortgage payments.
- Therapy and Nursing Care: Fund therapies, rehabilitation programs, nursing care, or home health services that may be necessary during your recovery.
- Housing Adjustments: Make changes to your housing situation to accommodate your medical needs, such as installing ramps or modifying your home for accessibility.
- Debt Repayment: Pay off outstanding debts, including mortgages, personal loans, or credit card balances to help relieve you of financial burdens during your recovery period.
4. Financial Security and Peace of Mind
Critical illness or trauma insurance provides you with a significant layer of financial security. Knowing that you have a lump-sum payout to rely on in case of a critical health event can offer peace of mind. This security allows you to focus on your recovery and well-being without worrying about the associated financial strain.
5. Tax Benefits
Although the premiums are not tax-deductible, in many cases, the lump-sum payout from critical illness or trauma insurance is tax-free. This means that you can utilise the entire amount for your needs without any tax deductions.
6. Independence and Choice
Having access to a lump sum empowers you with choices. You can make decisions about your treatment, care, and lifestyle modifications based on your preferences and individual circumstances, without solely relying on public health services or the financial assistance of family and friends.
7. Coverage for Unpredictable Events
Critical illnesses and traumatic events can happen unexpectedly, affecting anyone regardless of age or health. Critical illness or trauma insurance is designed to provide financial support precisely when you need it most.
Some of the most common critical illnesses covered by both critical illness insurance and trauma insurance in Australia may include:
- Heart attack
- Major organ failure
- Multiple sclerosis
- Parkinson’s disease
Keep in mind also that different insurers vary in their definitions of covered illnesses and conditions, so it would be wise to carefully read the documentation of the policy you are interested in.
For example, while “cancer” may be listed as a covered condition, the critical illness insurance policy definitions might further narrow it down to only certain types of cancer.
Understanding what your policy does and does not cover can help you decide whether you would need to get another type of insurance, as well as plan your finances.
How much you pay for critical illness insurance can differ based on who your insurer is, the policy you choose, your sum insured, and your age, health, and lifestyle. The cost is determined by the coverage amount and your age.
To make it easier for you to figure this out, you can use an insurance calculator provided by an insurer or find one online. These tools are a handy way to help you figure out how much your insurance might cost. You can also speak with a financial adviser who specialises in insurance and will conduct thorough research and find the best policy for your needs.
It’s worth noting that the lump-sum payment you receive from critical illness or trauma insurance is generally tax-free. you can use the full amount for your needs without any tax deductions.
Eligibility for Payout
To be eligible for a critical illness insurance payout, you must typically be diagnosed with a covered illness by a qualified medical professional.
You will need to provide a copy of your claim paperwork as well as any medical evidence required by your insurer’s claims team. Your financial adviser is usually happy to facilitate the claim on your behalf or if you do not have a financial adviser, you can liaise with your insurer directly.
How to Apply
To apply for critical illness/trauma insurance, you can purchase this through a financial adviser as part of your financial plan or contact an insurance provider directly. Typically, critical illness or trauma cover is available as a stand-alone or packaged with additional life insurance products.
You will need to complete an application form and provide information about your health and lifestyle. Be honest and accurate when completing the application form. For example, if you have any pre-existing health conditions, it is best to disclose them to the insurer.
The insurance provider will then assess your application and determine whether you are eligible for coverage. If you are approved, you will be offered a policy and you will need to pay the first premium upon establishment.
Do you need Critical Illness or Trauma Insurance?
Determining whether you need critical illness or trauma insurance involves considering your individual circumstances, financial goals, and risk tolerance.
- Assess Your Health and Family History: Start by evaluating your current health and any pre-existing medical conditions. Also consider your family history of illnesses, particularly those already covered by critical illness or trauma insurance. Knowing your health risks can help you gauge the potential need for this type of coverage.
- Financial Protection During Health Crises: If you were diagnosed with a critical illness or suffered a traumatic event, would you have the financial means to cover medical expenses, debts, or necessary lifestyle adjustments? If not, this type of insurance may offer you peace of mind.
- Existing Insurance Coverage: If you already have comprehensive health insurance, life insurance, or income protection insurance, these policies may partially cover expenses related to critical illnesses or traumas. It helps to review your policy terms to understand the extent of this coverage and where any gaps exist.
- Income Replacement: Consider whether you have sufficient income protection insurance or total and permanent disability (TPD) insurance. These policies can provide income replacement in case you are unable to work due to illness or injury. If you have such coverage, you may have a partial safety net in place.
- Support from Family and Savings: Reflect on the support available from family or friends in case of a health crisis. In addition, assess your savings and emergency funds. These resources can help cover immediate expenses during a medical emergency but may not be sufficient for long-term financial stability.
- Budget and Premium Affordability: Premiums can vary based on your age, health, coverage amount, and the insurance provider. Evaluate your budget to determine if you can comfortably afford the premiums.
- Consult a Financial Adviser: Seeking guidance from a qualified financial adviser can be immensely beneficial. They can help you assess your unique circumstances, analyse your insurance needs, and provide recommendations tailored to your financial goals.
- Consider a Combination: Some individuals opt for a combination of insurance policies to ensure comprehensive coverage. For instance, you might choose critical illness or trauma insurance in addition to Income Protection or TPD Insurance to create a safety net that addresses various scenarios.
How Does Critical Illness or Trauma Insurance Compare to Other Types of Insurance Covers?
Total and Permanent Disability (TPD) insurance and Income Protection (IP) insurance are two other types of life insurance products that are comparable to and may complement critical illness and trauma insurance.
What is TPD (Total and Permanent Disability) Insurance
TPD insurance is a type of coverage that provides a lump-sum payment if you become totally and permanently disabled and can no longer work in your occupation or any occupation suited to your education and experience.
What is IP (Income Protection) Insurance
Income Protection insurance is designed to replace a portion of your income if you are unable to work due to illness or injury. It provides regular payments (usually a percentage of your income) until you can return to work or reach the end of the benefit period.
Key Differences to Critical Illness/Trauma Insurance
Purpose of Coverage
- Critical Illness/Trauma Insurance: Provides a lump-sum payment upon the diagnosis of specified critical illnesses or traumatic events, such as cancer, heart attack, or stroke.
- TPD Insurance: Offers a lump-sum payment if you become totally and permanently disabled and can no longer work in your occupation.
- Income Protection Insurance: Replaces a portion of your income when you are unable to work due to illness or injury.
- Critical Illness/Trauma Insurance: Covers specific critical illnesses and traumatic events as defined in the policy.
- TPD Insurance: Covers total and permanent disability, often with more stringent criteria for qualification.
- Income Protection Insurance: Covers temporary or permanent illness and injury, providing regular income replacement for an agreed maximum period or until you can return to work.
- Critical Illness/Trauma Insurance: Provides a lump-sum payment upon diagnosis.
- TPD Insurance: Offers a lump-sum payment when total and permanent disability occurs.
- Income Protection Insurance: Pays regular income replacement, usually a percentage of your pre-disability income, on an ongoing basis.
Use of Funds
- Critical Illness/Trauma Insurance: The lump-sum payment can be used for various purposes, such as medical expenses, debt repayment, or lifestyle adjustments.
- TPD Insurance: The lump-sum payment can be used for any purpose, including medical expenses, living expenses, or home modifications.
- Income Protection Insurance: The regular payments cover ongoing living expenses, such as bills, groceries, and mortgage or rent payments.
- Critical Illness/Trauma Insurance: You become eligible when diagnosed with specific critical illnesses or trauma listed in the policy.
- TPD Insurance: You qualify when you become totally and permanently disabled and unable to work in your occupation.
- Income Protection Insurance: Eligibility is based on illness or injury preventing you from working.
Availability through Super Funds
- Critical Illness/Trauma Insurance: Not available in super funds.
- TPD Insurance: Generally available through super funds.
- Income Protection Insurance: Also generally available through super funds.
To find the right coverage for your needs and get the best deal possible, comparing critical illness / trauma insurance policies is a crucial step. One thing to remember is that price is not necessarily always the best factor to consider, as cheaper policies may have less favourable terms or become costly over time.
Here are some tips to navigate the process effectively:
- Understand Your Needs: Begin by assessing your specific needs and financial circumstances. Consider factors like your age, health, family history, and financial responsibilities. Understanding your unique requirements will guide your policy selection.
- Read the Product Disclosure Statement (PDS): Always read the PDS for each policy carefully. The PDS provides comprehensive information about the terms, conditions, and coverage details. It’s essential to understand what you’re signing up for.
- Critical Illnesses Covered: Different insurance policies will cover varying definitions of critical illnesses. Examine the list of covered conditions in each policy to ensure they align with your health risks and concerns.
- Coverage Amount: Determine how much coverage you require. Assess potential expenses such as medical bills, mortgage or rent payments, living expenses, and any other financial obligations you would need to cover in the event of a critical illness.
- Exclusions and Waiting Periods: Pay close attention to policy exclusions and waiting periods. Some policies may have exclusions for certain conditions or impose waiting periods before you can make a claim. Be aware of these details to avoid surprises later.
- Premium Costs: Compare premium costs from different insurers. Premiums can vary significantly based on factors like your age, health, lifestyle, and the coverage amount. Ensure that the premiums are affordable and fit within your budget.
- Policy Features: Look at additional features or riders that may be included with the policy. Some policies offer benefits like partial payments for less severe conditions or inflation protection to keep up with rising medical costs.
- Policy Term and Renewability: Understand the policy term and whether it can be extended or reinstated. Consider how long you want the coverage to last, especially if you plan to rely on it for long-term financial security.
- Compare Insurers: Researching and comparing insurance providers is a must. Look into their reputation, customer service, and claims processing. Check for customer reviews and ratings to gauge their reliability. One comparison tool you can use is Moneysmart’s Life insurance claims comparison tool, which shows statistics on insurers (percentage of claims paid, average claims processing time, and the number of disputes lodged against the insurer). Also, don’t hesitate to ask questions. Reach out to the insurance provider or agent to clarify any doubts or seek additional information.
- Seek Professional Advice: Consider consulting with a qualified insurance adviser or financial planner. They can provide expert guidance, help you assess your needs accurately, and recommend suitable policies based on your individual circumstances.
- Review and Reevaluate Regularly: Once you’ve chosen a policy, periodically review your coverage to ensure it remains appropriate as your circumstances change.
Critical illness and trauma insurance in Australia provide valuable coverage for those facing serious health challenges. In this article, we’ve examined both insurance terms, explored their features and benefits, and compared them to related insurance products like TPD Insurance and Income Protection to aid you in selecting the most suitable coverage.
When considering if you need critical illness or trauma insurance, remember to assess your health, financial situation, and coverage requirements. To find the policy that is right for you, it is important to conduct thorough research, compare offerings from reputable providers, and consult with insurance experts if necessary.
Ultimately, by understanding these insurance options, you can make an informed choice that aligns with your specific needs and secures your financial well-being for years to come.
Protect Yourself and Your Loved Ones with Central Coast Financial Planning Group
Life insurance is an important investment to ensure the financial security of you and your loved ones in the face of unexpected events. By understanding how your personal insurance impacts your future, you can make informed decisions when choosing the best policies and coverage for your needs.
Seeking the advice of an experienced wealth protection adviser who specialises in insurance can make it easier for you to find the most comprehensive and cost-effective options.
Do you need specialist insurance advice from a professional financial adviser? CCFPG is here to help you.
DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.