Trauma insurance was recently described to me as being similar to buying a lottery ticket. Although I didn’t completely agree with the analogy, it’s a mindset that is worth exploring (and refuting).
Trauma insurance, also known as critical illness insurance or major illness insurance, is designed to step in if critical illness strikes. The most common claims are for cancer, heart attack, coronary bypass, and stroke – or the “Big 4” as they are referred to in the industry. And most policies also cover an enormous list of other bad things that you really don’t want.
Modern medicine means that these diagnoses are not necessarily a death sentence. With the advances in medical care and treatment, if diagnosed early enough, a person can often eventually return to a similar lifestyle they enjoyed prior to the condition arising.
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Why trauma insurance is like a lottery ticket
This is where the lottery ticket analogy comes in. If you have trauma insurance and are diagnosed with a condition covered by the policy, you will get a payout of a lump sum, possibly of hundreds of thousands, depending on the level of cover you purchased.
The argument goes that in Australia, the medical costs you incur will be far less than the payout, as your private health insurance or the public hospital system will cover most of these costs. Hence, have a heart attack, spend a week in hospital, and end up with a six figure sum in your bank account – sounds fantastic!
Okay, but before you rush off to buy a policy and demand to be ‘super-sized’ at your favourite burger restaurants in hope of a heart attack, there are a few other things to consider.
There’s more to critical illness than medical bills
Although you may not be out of pocket a significant amount for medical expenses, the strain it can put on other areas of the budget and the family can be enormous, particularly if treatment is a long-term process.
- If you are not an employee (e.g. contractor or self-employed), you will probably not be able to get income protection insurance. So trauma insurance may be the only viable alternative to substitute your income if you are off work for a long period of time due to illness or injury.
- Even if you do have income protection insurance, this will only cover a portion of your income, and there may be several weeks before it kicks in. Trauma insurance may pay a lump sum at the time of diagnosis or injury, without the same waiting period.
- Your partner may have to give up their work to look after you. Trauma insurance may provide money for your partner to afford to care for you while you are both off work.
- If you need to travel to a larger city for treatment, you may get accommodation and travel allowances from the government, but your partner and children may not be eligible for these allowances – especially if you are in hospital. Trauma insurance may be useful if you use the money to cover accommodation and travel for your partner and children.
- You may need to purchase equipment and make renovations to your home during the recovery period. If you’re now in a wheelchair, have newly-restricted mobility, or have become blind, the modifications to make your home liveable can cost a lot of money – which is where trauma insurance can help.
- There may be a specific treatment or rehabilitation program which is available only overseas and is not covered by Medicare or your health insurance policy. Trauma insurance may cover this as well.
Trauma insurance or critical illness insurance is almost exclusively bought with advice from a financial planner, as part of a package with term life insurance and TPD insurance. Plus your adviser will quite likely recommend taking out an income protection insurance policy as well.
But all of these things can also be bought direct from an insurance provider, as long as you check that the coverage will be just as good as an advised policy would provide!
Critical illness insurance: Is it worth it?
Whether the cost of premiums will be worth the coverage you get is a matter for you to decide based on your personal financial situation.
Financial planners and advisers are required to take into account your financial and personal situation before making a recommendation about a policy and the level of cover provided. However, it is possibly the hardest one for them to judge accurately as there are so many unknown variables involved. Advisers will often err on the conservative side when it comes to their recommendation – which is the sensible and prudent thing to do in their position.
For this reason, I believe that trauma is perhaps the one where you, as the client, need to take the greatest responsibility for deciding the amount of money you would need, and how your family would cope, if you were diagnosed with a serious illness.