June 18, 2015
This Insurance How To goes back to basics and explains the purpose of trauma cover and how to calculate an appropriate sum insured for your clients…
At a glance
Provided by: BT Financial Group
Topics covered: trauma cover, calculating sum insured
Trauma insurance generates a range of views in the financial advice community. On one hand, it’s often generalised as the cover type easiest to understand – for example, if a client is diagnosed with a disease, it will provide them with their sum insured. It is also the most likely lump sum cover on which a claim will be made.
So what exactly is important when looking at trauma policies, how do you construct a sum insured, and what are the product choices you need to consider when recommending it as the best option for your client?
What is it called again?
We can hardly blame consumers for being confused about trauma when, as an industry, even we can’t agree on a name for it, often referring to it as any combination of recovery, critical illness, crisis or living insurance.
Trauma insurance can fill the gap between total and permanent disability (TPD) (for clients who are unlikely to work again) and income protection (for clients who are unable to work either temporarily or permanently).
Trauma payments require you to meet the definition of one of a list of specified sickness or injuries. So, rather than being about the level or length of the disability, trauma payments are generally based on being diagnosed with a specified sickness or injury.
How much cover is enough?
Deciding on the right amount of cover for your clients will involve a detailed discussion around what they may need if they were to be diagnosed with a specified sickness or injury and what kind of financial assistance they may require.
If your client already has income protection insurance, then you may consider topping up their cover with trauma insurance, as income protection generally only covers 75% of income.
You may also want to consider any other forms of income, which contribute to the household. If your client was diagnosed with MS, would they need and/or prefer for their partner to take some time out of the workplace to look after them and their family? If so, your client may wish to allow between six months and two years of the after-tax income of their spouse so they have the option to take the time off work.
The cost to have access to the best medical care available, including the cost of treatment, potential travel and accommodation and ongoing therapy should also be considered. It can be difficult to quantify how much could be required, so how much is the right amount to recommend?
As costs and treatment options vary greatly from disease to disease and across different situations, advisers need to discuss these options with their clients to ensure the sums insured match the client’s expectations. Gone are the days of adding a nominal figure of $100,000, simply because it sounds like a decent amount of money.
Planning post treatment
Finally, it’s important to discuss what changes your client may like to make to their life as their illness progresses. Priorities could change – they may wish to reduce working hours or cease work entirely. You should discuss with your client how these objectives can be achieved, such as through replacing income or reducing debt, so that less employment income is required.
Trauma cover provides flexibility
Ultimately, trauma cover can give clients peace of mind by providing financial assistance at a time when they are facing catastrophic and frightening news. As it is not specifically related to income, the possibilities for cover can be broader, and so advisers should be well-versed on how the trauma sum insured can be tailored to provide different outcomes.
An informed recommendation can only be drawn out through a detailed conversation with your client about what they would like their lives to look like in the event of diagnosis of one of the trauma events. Having the right amount of cover, structured in the appropriate way, will make a world of difference for clients at a very difficult time.
To find out more about BT’s Protection Plans, call 1300 653 553 or visit www.bt.com.au.