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Trauma cover is a great financial risk product that can be very beneficial. However, as with all things insurance there is the good, the bad and the ugly. For many clients that I see for the first time, especially people those who are reviewing their cover which has been in place or a while, they nearly always have trauma. For many people, when thinking about how to stack their cover, there is quite often life, trauma and one or two other types of cover.

So what is it, and as the questions asks in the title – is it critical? As I like to do, there is a slight play on words. There is a type of trauma product that is deemed to be more critical, in terms of how munted you need to be to claim. We’ve discussed this before; yes, munted is a technical insurance term! So, there are products that focus on ‘critical’ conditions and leave alone the less-intense conditions and definitions. (The banks historically had ‘critical care’ products that were ‘skinny’ versions of a full-blown trauma cover). There are also many advisers who will say that having trauma cover in the product mix is also ‘critical’ to providing a good breadth of cover. Just to confuse things too, there are different types of trauma cover; extensions, additional benefits and enhancements. Cancer cover and TPD (total and permanent disability) extensions to name two.

Must be specific

So, first things first. Aware that I didn’t really answer the question in the last paragraph, let’s try again. Trauma is a lump-sum benefit paying cover that pays on specific condition-claims. Jargon. In plain English, if you have insured $100,000 for trauma cover, you will be paid $100,000 in one go. This is assuming that you meet the specific definition of the condition listed in the policy document. For instance, a cancer condition will (likely) trigger the trauma claim. It is a specific condition listed in the policy document. A stroke will trigger a claim. A cold caught on the bus from town, will not. Where things get tricky, is when clients believe that they’ve had a traumatic experience (and indeed they might have), but this ‘experience’ is not a clearly defined medical definition, as per the policy document.

Example of non-specific versus specific

A friend of mine, we’ll call him Paul, used to own a computer products company. Extremely fit, a gym bunny, Paul didn’t drink, smoke or take coffee. One morning he couldn’t get out of bed. He had no idea what was going on. It took the doctors about 4-5 months to work out that it was a thyroid-type issue. Now, if Paul had trauma cover – he would not have been able to claim, as thyroid conditions are not one of the 40-50 conditions which the insurers would cover. My father-in-law, a few years ago, was diagnosed with motor neurone disease. A nasty disease that is terminal. That is a specific condition, listed under trauma cover.

Great so what about cost?

Again, with all things ‘personal insurance’ cost goes up as you get older. The older you get, the more chance you have of things ‘going wrong’ and wearing out. That means that you, as a risk to the insurer, increase the chance of them needing to pay out a claim on you. This is where I see people come a little unstuck.

Trauma is great, especially when you are younger; the cost isn’t that large, and the potential pay-out can be quite beneficial. Many insurance advisers will recommend about 2 years of gross income to the clients for trauma cover. The view held by many in the industry is that trauma cover can be used as an income-replacement tool. For instance, if you have a car crash, you may end up with major burns or a head injury both of which would trigger a trauma claim. It may take you a couple of years to recover enough to return to work. Take an average person on say $90,000, that means $180,000 of trauma cover might be recommended. That will start getting very expensive the closer you get to age 65. I do quite a few reductions in trauma cover primarily because the cost has become unsustainable. This is not a bad thing, you should review your cover regularly, to make sure that it is fit for purpose and meeting both your current circumstances and budget.

What if something happens more than once?

Bad things happen, right? We hear of people who had a heart attack one year, then a few years later they have stroke. How does that effect a trauma policy? Well, it depends on the type of cover that you have and the details (and tick-boxes) that you’ve selected. In the second paragraph, I mentioned additional benefits, one of which is known as a ‘buy-back. This lets you ‘reinstate’ your trauma after a claim, but only after a 12 month stand down. And you obviously cannot claim on the original condition again, as this would be classed as a “pre-existing condition”.

So… what are the options?

There are products on the market that will allow multiple claims for trauma. Three distinct ones are Trauma Multi (Fidelity Life), Continuous Trauma (Asteron Life) and Progressive Trauma (AIA Life). All three are great products, but they each have their differences and distinct flavours. Please refer to your financial adviser for specific advice. I will not separate these products with their differences in benefits in this article, but I do want to highlight the prices between these and a ‘standard’ trauma. There would be valid reasons for taking any of these following examples, the purpose here, is to illustrate the differences in price. Why? To demonstrate that you can make a substantial difference to your financial protection, by choosing different products, without necessarily blowing out on price.

Example: 40 year-old, male and female, both non-smokers. Standard terms (i.e. there is not any loading on the premium). They both earn $90,000p.a. income, so the adviser is going to recommend $180,000 each.

  • On a standard trauma product without a buy back, the price would be approx. $125pm (or $28.85pw) for both.
  • On Progressive Care approx. $109pm (or $25pw)
  • On Trauma Multi approx. $143pm or ($33pw)
  • On Continuous (with early Trauma) approx. $143pm (or $33pw)

 

So, for a an additional $18 a month, this couple could have cover for multiple events. Why is this important? We know that people who have one trauma claim are 29% more likely to have an additional trauma event happen to them. There was a study complied by AIA (Singapore) which concluded this in their findings. For the sake of a coffee a week, it is probably worth it.

Trauma is a great product but keep doing your regular reviews with your registered financial adviser. It is one of the products that can run away from you. If you haven’t heard from your adviser for a while (like 4-5 years which I hear very often), then drop me a line. There are ways to modify your insurance stack as you go through the different life-stages towards (and past) retirement.

NZ Health Insurance
Dominic Bish

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