Worked Examples and Checklists
Is trauma insurance worth it in Australia? A worked decision
What trauma (critical illness) insurance pays, why it cannot be held in super, how it differs from income protection and TPD, and a worked cost-benefit example.
Trauma insurance is worth considering if a serious illness would create costs and income losses that your other cover would not meet: time off for a partner to care for you, treatment gaps, travel, home help, or the waiting period before income protection pays. It pays a lump sum on diagnosis of a listed condition, such as a defined cancer, heart attack or stroke, whether or not you can still work. It cannot be held in super, so it is paid from after-tax money, and premiums rise steeply with age. For many people with good income protection and an emergency fund, a moderate amount is enough; for people without income protection, such as some self-employed people, trauma can fill a bigger gap.
This guide is part of the worked examples section. Figures are illustrative.
How trauma cover works
- Lump sum on diagnosis of a condition that meets the policy definition. Policies list many conditions, but most claims come from a few: cancer, heart attack, stroke and coronary artery surgery.
- Definitions matter. "Cancer" often excludes early-stage or low-grade cancers, or pays only a partial benefit for them. "Heart attack" may require specific test results.
- Survival period. Many policies require you to survive a short period after diagnosis, such as 14 days.
- Waiting period for some conditions. Cancer and some heart conditions are often excluded if diagnosed in the first 90 days after cover starts.
- Not in super. Since 1 July 2014, super funds cannot provide new trauma cover, because a diagnosis is not a condition of release.
- Not deductible. Premiums are paid from after-tax income, and benefits are generally tax-free.
- Linked or standalone. Trauma linked to life cover reduces the life cover when paid; standalone trauma costs more but leaves life cover intact.
How it fits with other cover
| Situation after a serious illness | Life cover | TPD | Income protection | Trauma |
|---|---|---|---|---|
| You die | Pays | — | Stops | May have paid earlier |
| You can never work again | — | Pays if definition met | Pays to end of benefit period | May pay on diagnosis |
| You are off work 9 months, then recover | — | Not paid | Pays after waiting period | Pays on diagnosis |
| You keep working through treatment | — | Not paid | Not paid (or partial) | Pays on diagnosis |
| Partner takes 6 months off to care for you | — | — | Not covered | The lump sum can be used for this |
Trauma's unique role is paying regardless of your work capacity, early, and as a lump sum you can use for anything.
Worked example: is it worth it for Sophie?
Illustrative: Sophie, 41, an accountant earning $130,000, has a partner and one child. She holds:
- Death and TPD of $900,000.
- Income protection of $7,583 a month (70% of $130,000 ÷ 12) with a 30-day wait to age 65.
- Private hospital cover (outside the scope of this site).
- An emergency fund of $15,000.
Her family history includes breast cancer. She asks: what would a cancer diagnosis cost the household that her current cover would not?
| Cost | Estimate (illustrative) |
|---|---|
| Income lost in the 30-day waiting period plus arrears month, after leave | $5,000 |
| The 30% of income that income protection does not replace, over 9 months off: 30% × $10,833 × 8 benefit months | $26,000 |
| Partner reduces to part-time for 6 months: loss of about $2,000 a month | $12,000 |
| Out-of-pocket treatment, scans, medicines, travel | $10,000 |
| Home help and childcare | $6,000 |
| Total | $59,000 |
Less emergency fund $15,000 = a gap of about $44,000.
Sophie considers $100,000 of trauma cover. An illustrative stepped premium at 41 is $900 a year, rising with age. Over ten years that might total about $13,000. If she prefers a cheaper option, $50,000 of cover would roughly match the calculated gap at about half the premium.
The arithmetic for the 30% gap: $130,000 ÷ 12 = $10,833 a month. 30% × $10,833 = $3,250 a month. For eight benefit months, $3,250 × 8 = $26,000.
Decision: With strong income protection, a $50,000 to $100,000 trauma benefit covers the realistic gap. Without income protection, she would need much more, or better, buy income protection first.
Who often finds trauma valuable
- Self-employed people without income protection or with long waiting periods.
- Households where a partner would need to stop work to provide care.
- People with family histories of conditions covered by the policy, though these may lead to exclusions or loadings.
- Parents with young children, where a few months of extra help matters.
Who may not need it
- People with good income protection, savings and a partner whose income covers essentials.
- Older applicants, where premiums are very high relative to the benefit.
- People who would have to drop income protection to afford trauma. Income protection is usually the stronger protection.
What to check in the PDS
- Definitions of cancer, heart attack and stroke, and partial payments for early-stage conditions.
- Initial exclusion period for some conditions.
- Whether it is linked to life cover (and reduces it) or standalone.
- Reinstatement options after a claim.
- Premium structure and the expiry age.
See also stepped versus level premiums and cover inside super versus retail.
Frequently asked questions
Is trauma the same as critical illness insurance?
Yes. Australian insurers use the terms trauma, critical illness and recovery insurance for this type of cover.
Is a trauma payout taxed?
Generally no, for a policy you own on your own life. Ask a tax adviser about policies owned by a business or another person.
Can I get trauma cover with a pre-existing condition?
Possibly, with an exclusion for that condition or a loading. Answer the application questions fully.
Sources
- Moneysmart — trauma insurance
- ATO — tax on insurance payouts
- Cancer Council — information on cancer costs and support
