How much trauma cover?
The question of how much trauma cover is ideal remains vexed.
Monday, October 15th 2018, 11:32AM 
4 Comments
by Russell Hutchinson
Russell Hutchinson
All insurance sums insured are supposed to be based on the concept of indemnity. Too much and we create hazards, too little and we have shortfalls.
The principle of indemnity is reasonably clear in most of the methods of calculating life, total and permanent disablement cover, and income protection. Indeed, with income protection (including mortgage protection as part of a package), insurer’s experience is such that none offer full indemnity.
Medical is a reimbursement plan. What’s left is trauma and the challenge on how to set sum insured.
What does indemnity look like for trauma cover? The challenge is that as the benefit is paid on diagnosis, not impact on life, indemnity is not easy to calculate.
One heart condition may be bad that the client is effectively disabled for life, another may find that surgery and drugs have them back to normal within weeks – and many policies would pay the same for both events.
These are the main methods used to overcome this difficulty.
Give up – and just pick a number. Although this seems to admit complete failure, not addressing indemnity at all, it is, in effect, the approach suggested by some academics. I don’t like it personally.
Treat trauma as lump-sum income protection – and use it where income cover is not available, or the client cannot afford the level of cover required.
They are substitutes for one another in the same way bikes and cars are both forms of transportation. Similar, but different.
Short-term income-based: one example I wrote about not long ago was to set trauma sums at about two years income – based on cancer (which accounts for between 45% and 65% of trauma claims, depending on sex of the client) as this covers a typical cycle of diagnosis, treatment, and outcome.
Long-term income-based: another example from Steve Wright at Partners Life was the concept of setting the sum at the level required to cover the gap between the maximum income protection that can be bought and the income the client would have earned. This shares some of the features of the decision by some advisers to use trauma cover where the client will not buy income protection… and it shares some of the same problems.
Finally, with income protection typically costing between 2% and 4% of income, adding many other benefits, especially expensive ones like trauma, creates cost problems. There are some choices available that can help: a wide range of serious/major/severity-based trauma options from AIA-Sovereign, Asteron Life, Fidelity Life and Partners Life.
These options all exist to provide more dollar coverage for the big events for less premium.
But whatever sum insured that you choose, the budget window will likely give your number a haircut.
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Comments from our readers
This is one product that is both versatile and at the same time limited in its use.
The limited in its use is premium driven, my experience and that of my learned colleagues over the years has been once clients get to 50ish they substantially reduce cover due to increased costs.
There's certainly the fallback position of a lump sum in the absence of income protection, I’d prescribe five times annual gross as a starting point, Tash, this gives the ability, if managed well, to give up to 10 years net income value, if not more.
Fundamentally it's a case of prescribing where it is needed, as a top up on shortfalls when using the range of available products.
Medical cover for unfunded treatments (and the rest)
Income protection for income
Trauma then helps with the other stuff
Short-term debt, loss of partner income if they have to stop work for a period, modification of the living environment or funds for unexpected costs.
The reality has been clients have also spent the money on things like family travel and memories.
When looking at claims, depending on the provider, the average trauma claim is 90-140k. When you unpack this against client situations, it often looks like 50k plus six months net household income.
With the 50k being about what is needed to modify a house for disabled access.
We have advice aspirations about paying down mortgage debt at claim; the harsh reality is that portion of the cover is often gone by the time the average claim arrives. So TPD is the more appropriate product to address mortgage debt.
We should be taking the claim realities into account when prescribing this product, and advising rather than using the premium for the mortgage debt for trauma insurance, and it should be directed directly against the debt, its a more certain impact for the client that results in a better claim outcome.
Appreciating that premium is after the application of medical and income insurance.
I agree - it is hard to decide - and make no firm prescription. If the client can afford it, then the higher sum is preferable. But the shorter-term definition shows what even a more modest budget can achieve.
Best wishes, RussellH
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Interesting issue.
Just to confirm, do you recommend 2 years income based on the Cancer diagnosis treatment and outcome? What if the outcome (after two years) is dire? around 5 years to live? Do you recommend trauma cover of 5 years or 7 years income? Disability products may not pay until a fair bit later.
Whatever, clients probably cannot afford trauma cover of 5 years income. this is why I sell around a year's income worth of trauma cover for less serious trauma and closer to 5 years cover for severe trauma. combining trauma cover and severe trauma cover seems to me to match the real risks and is affordable.