Trauma insurance – What is it? Do I need it?

Trauma insurance is a type of insurance cover. It’s when you get a massive lump sum of cash deposited in your bank account if you get seriously sick or injured.

You could have anywhere between $500k – $2 million deposited into your account. It typically gets paid 14 days after your claim gets approved. Best of all, it’s tax-free.

This can help ease the financial burden of being sick. You can also use it to pay for expensive, life-saving medications the government doesn’t fund.

But, as an insurance adviser, I know there are some catches and limitations.

So in this article, you’ll learn what trauma cover is. You’ll learn how expensive it is and what you can do to make sure you get the best cover available.

What is trauma insurance?

Trauma insurance is sometimes also called trauma cover. The insurance industry created it so you can focus on recovering from an illness without worrying about money.

There's only so much sick leave and annual leave your boss will pay for. So, at some stage, most people need financial help if they get sick and can’t work.

This is where trauma cover comes in.

Once you get diagnosed with a qualifying serious illness, you make a claim. Your insurance company will pay you, often within 14 days.

Anyone between the age of 16 and 70 can apply for trauma insurance. However, the cost varies based on a few factors. I’ll cover this more below.

Here’s an example of where trauma cover can help.

Before I started helping Kiwis with their insurance, I knew someone who had throat cancer. This was back in 2019.

He had to take a long time off work. Luckily, he had trauma cover. He got paid out and could take 8 months off work to focus on getting better.

This is one of the reasons I became an insurance adviser; to help people protect themselves when bad things happen.

Outside medical insurance, it’s the 2nd or 3rd most used type of insurance. That means a lot of people end up using it and making a claim from their insurance company.

Why have trauma cover?

A lot of people get diagnosed with an illness at some point in their life.

When that happens, you may not be able to work. After some time, your income goes down.

So some people find themselves fighting on two fronts: They struggle with the injury or illness and they also run into financial trouble.

Perhaps you can’t pay your bills or your mortgage payments.

The trauma payout won’t fix your illness or solve all your problems, but it can alleviate some of the financial burden of getting sick for you and your family.

More from Opes:

• Landlord insurance - Do I need it? (Article)
• Mortgage protection insurance - What is it and do I need it? (Article)
• Income protection insurance - What is it and do I need it? (Article)

What are the pros and cons of trauma insurance?

Trauma insurance, like all insurance, has pros and cons. Let’s dive in.

Pro #1 – You get paid a large, tax-free lump sum

The money from trauma insurance is paid directly into your bank account. It comes quickly, usually within 14 days of making the claim. So if you get sick, you get the money fast.

Once you get your payout, you can do lots of things with it. You could retire, pay down debt, or use it to supplement lost income.

Or, if you need non-Pharmac medication (that’s expensive), it can cover that.

Pro #2 – You can also get it to cover your children

If the unimaginable happens to your children, you can use trauma cover on their behalf.

One of the worst things a parent can imagine is their child getting sick; it’s devastating. Parents then want to take time off work to be with their sick child, or they may want to spend money on medication the government doesn’t fund.

This money can enable parents to be by their child’s bedside, without the money stress.

Most companies offer up to $50,000 if a parent has Trauma Cover. But there are lots of terms and conditions, so have a chat with an insurance adviser.

Con #1 – It only covers certain illnesses

Trauma insurance only covers the most common illnesses. Things like cancer, a heart attack, and a stroke.

If you are struck by a rarer illness that’s not on the list then there is a chance you won’t be able to claim it.

So, you’ll need to decide about how much risk you are willing to take. To insure for more illnesses, that is more comprehensive cover. In this case Income Protection could be a consideration.

Con #2 – It's a one-off

Generally, you can only claim trauma cover once for the same illness.

There are some exceptions to these rules, but some policies say that once you claim trauma cover for a previous illness, you can’t claim again.

So, let’s say John got stomach cancer in 2020. If, in 2024, he gets an unrelated skin cancer, he will be covered. But if his stomach cancer returned, he wouldn’t be.

How much does trauma cover cost?

“How much does trauma insurance cost?” is one of the most common questions I get asked.

Trauma insurance can range from $6.50 a week to $40 a week. It depends on you – how old you are and how much you want to be insured for.

Cost is one of the most frequent questions I get asked, but also the hardest to answer because the cost is always different.

But I still want to give you an answer, so here are a few scenarios to show you the range:

Remember, these are just examples to give you an idea. I’m not saying that if you have exactly the same circumstances your cost will be the same.

Scenario #1 – Someone in their 60s

Trish is a 60-year-old woman and has trauma cover for $100k. That means if she gets ill, she will be paid out $100,000.

The cost of the insurance (premium) is $39 a week.

So, if Trish gets cancer, she’ll be paid a lump sum of $100k into her bank. But not every illness results in a payout; it’s only the ones that are agreed in her insurance policy.

Now, if Trish was a man, the weekly amount goes up to $72 a week.

Scenario #2 – Someone in their 30s.

Lucy is a 35-year-old non-smoker. If she covers herself for $100k (same as Trish), the premiums are $6.50 a week.

If she insured herself for $1 million, the premium jumps to $40 a week.

So the cost of trauma insurance depends on your age, your gender, if you smoke and how big you want the payout to be.

How much trauma insurance should I get?

I usually tell my clients to take out as much trauma insurance as they can afford. That’s not just me trying to sell you stuff.

Here’s a story to show you why.

The biggest claim I ever saw being paid out was $2 million.

I insured a 41-year-old guy in the South Island who owned a construction business. He’d just taken over the business, but within the year he was diagnosed with cancer. Within 14 days, he was paid $2 million.

He survived … as did his business. His trauma cover allowed him to pay off his debt to the bank and it also gave him time off to recover from his illness.

Think about how much $100k would last you. In most cases, that’s around a year’s salary.

It’s going to be immediately helpful if you are sick, but it won’t go much past a year.

This is why trauma is often bundled with income protection, which I’ll explain next.

Trauma cover vs income protection – what’s the difference?

You’ll often hear trauma cover and income protection used together.

While they complement each other well, they are very different types of insurance.

Trauma cover is more selective with the illness it covers. Most insurers have a list of up to 47 illnesses. If your illness isn’t on this list, you won’t be covered.

Whereas income protection is less picky. It covers everything except war/terrorism, pregnancy, and self-harm.

But here’s the main difference.

Trauma insurance is a one-off payment for however much you insured yourself for. After that, it’s done.

Income protection is a monthly payment (up to 75% of your income) for a predetermined amount of time. Now, that could be 2 years or until you turn 65. Yes, even if you start claiming in your 30s.

I’ll give you an example of how income protection insurance can work. I am currently working with an investor we helped buy a property at Opes. This investor is using his income protection to invest in properties.

He was a chiropractor and couldn’t work after an illness that affected his wrists.

He’s now getting paid $138k a year through his insurer and he’ll continue to get this until he’s 65.

Should I speak to an insurance adviser?

People often buy trauma cover online because it’s cheaper, and less hassle.

But just because something says trauma cover on the tin doesn’t mean that’s what’s in the tin.

As mentioned earlier, trauma cover has (up to) 47 listed illnesses they will cover; it depends on the insurance company.

Now, each one of those 47 defined illnesses has a gauge. This shows whether the illness you get is “claim worthy” or not.

So you might get a heart condition, but if it’s not serious enough you might not qualify for a trauma payout.

This is where it’s extremely important to speak to an adviser.

Imagine this: You contact your online insurance provider and say: “I've been diagnosed with cancer.” Then they say: "The insurance you have doesn’t cover your illness".

So speak to an adviser who has read all the terms and conditions. That way, they can point out any catches you need to know about.

Should I get trauma insurance?

In my opinion, trauma cover is a great insurance product ... as long as you get the right type.

And if you’re going to get it, don’t skimp on the price.

I’d rather have the right quality insurance with a lower sum insured rather than a cheap, $1 million sum that I was unlikely to get.

Here’s the problem with trauma cover.

Most young people don’t often think about health problems. They don’t think about what getting sick (or what their children getting sick) would do to their family.

It’s not until the bad things happen that people think, “I should have got trauma insurance”.

So, if you’d like to talk about trauma insurance, feel free to get in touch with me or my team at Opes Insurance.