Trauma insurance: how critical illness cover works

Trauma insurance pays you a lump sum if you are diagnosed with a condition on the list in your policy, provided the diagnosis meets the definition written there and you survive the stand-down period. There is no requirement to stop working, no requirement to be permanently impaired, and no restriction on how the money is spent.

That last point is the whole design. The costs of a serious illness are rarely the ones a household has budgeted for. Someone treated for cancer in New Zealand may have most of their treatment funded publicly and still be tens of thousands of dollars out of pocket — through lost income while they are in treatment, a partner reducing their hours to provide care, travel and accommodation for treatment in another city, drugs that Pharmac does not fund, and the mortgage that keeps falling due on the fifteenth of every month.

What people actually spend it on

• Replacing income during treatment and recovery, for themselves and often for a partner who stops work to care for them.
• Non-Pharmac drugs and treatments that the public system does not fund.
• Paying down or clearing the mortgage, to reduce the monthly pressure while income is uncertain.
• Travel and accommodation where treatment is not available locally.
• Modifying a house, or buying help with children and housework.
• Simply buying time — the ability to say no to work for a year without the finances collapsing.

New Zealand trauma policies typically list somewhere between thirty and sixty conditions. The length of the list is close to irrelevant. Three conditions — cancer, heart attack and stroke — dominate claims, and the definitions attached to those three are where a policy is won or lost.

A definition is a medical test written in contractual language. A heart attack definition may require specified troponin levels together with defined ECG changes or evidence of infarction on imaging. A cancer definition typically excludes certain early-stage and low-grade tumours, or pays them as a partial benefit. A stroke definition usually requires neurological deficit persisting for a set period, with imaging evidence.

Because the definitions are technical, insurers update them over time. Ask whether the insurer operates a wording pass-back — a promise that improvements to definitions will apply to existing policyholders. Not every insurer does, and on a policy you may hold for twenty-five years it is a meaningful difference.

Three structural choices determine what your trauma cover costs and what it does. They matter more than the brand on the policy.

Accelerated or standalone

Accelerated trauma is attached to life cover and draws it down. If you hold $700,000 of life cover with $200,000 of accelerated trauma and you claim the trauma benefit, you keep $500,000 of life cover. Standalone trauma is a separate sum insured that does not touch the life cover, and costs more for that reason. Accelerated with a buy-back option is the middle path many advisers use.

Severity-based or full-payment

Traditional trauma pays 100% of the sum insured when the definition is met, and nothing when it is not. Severity-based policies pay graded amounts — for example a partial payment for an early-stage cancer that would fail a traditional definition entirely, and the full amount for an advanced one. A severity-based policy can pay in more situations and pay less in some of them, which makes comparing two quotes on price alone actively misleading.

Multiple claims

Standard trauma cover ends when it pays. Some policies allow further claims for unrelated conditions, sometimes after a stand-down, sometimes with a reduced sum insured. If you are insuring against a long life with more than one serious illness in it, that provision is worth understanding before you buy.

There is no equivalent of the mortgage-plus-income calculation that sizes life cover. Trauma is bought to buy time, so the sensible way to size it is to ask how long you would want to be able to stop, and what would have to be paid during that period.

1. 1Decide how long you would want to be able to be off work — one year is a common answer, two years is safer for a serious cancer diagnosis.
2. 2Multiply your household’s essential annual outgoings by that period.
3. 3Add anything you would want to clear outright, most often part or all of the mortgage.
4. 4Add a realistic allowance for treatment costs the public system does not fund, and for travel.
5. 5Subtract what income protection would pay over the same period, and any employer sick leave.
6. 6The remainder is the trauma gap. For many New Zealand households it lands somewhere between one and three times annual household income.

Affordability is the constraint that usually decides it. Trauma cover is expensive relative to life cover, because claiming on it is far more likely than dying young. Where money is tight, a smaller trauma sum insured held permanently beats a large one that gets cancelled in five years — and income protection usually deserves the first call on the budget.

Every New Zealand insurer writes trauma cover to its own wording, and the words are where the money is. Two policies that look identical on price can pay very differently when it matters. Closing that gap is the entire job of an adviser.

• Cancer definitions differ most where it matters least visibly — early-stage prostate and breast disease, melanoma depth thresholds, and carcinoma in situ.
• Heart attack definitions have moved as troponin testing has changed. Older wordings can be harder to claim on than current ones, which is why pass-back matters.
• Some insurers include a buy-back of life cover after an accelerated trauma claim at no extra premium; others charge for it or do not offer it.
• Children’s trauma cover is inexpensive and included by some insurers as standard — it should never be the reason to choose an insurer, but it is worth asking for.
• Severity-based and full-payment products cannot be compared on premium alone; an adviser can map the same diagnosis across both.
• Where a health history makes trauma cover expensive, an exclusion on one body system is often a better outcome than a decline or a whole-of-policy loading.

There are three ways to buy life cover in New Zealand, and they are not equivalent. You can buy direct from one insurer, which means you see one product range and one underwriting appetite. You can buy through your bank, which usually means a single insurer’s product sold under the bank’s brand, often with narrower definitions. Or you can go through an adviser, who quotes several insurers at once and is required to put your interests first.

The premium you pay is the same either way. Insurers build adviser commission into their pricing whether or not an adviser is involved, so going direct does not get you a discount — it just removes the person whose job is to argue your corner at application and at claim time.

• An adviser can see which insurer is currently taking your health history on standard terms, and which one will load or exclude it.
• An adviser can structure cover across two insurers if that produces a better outcome than putting everything with one.
• An adviser handles the underwriting back-and-forth, and is the person who chases the claim when a family is least able to.
• An adviser has to document why the recommendation suits you, which is a written record you can hold them to.

We are a referral service, not an insurer. We do not quote premiums and we do not sell policies. What we do is put you in front of one licensed New Zealand adviser who can compare the market properly.

1. 1

   You tell us what you are looking at

   The form takes about a minute. Nobody asks for your medical history on a web form — that conversation happens with the adviser, properly, and only once you have decided to proceed.

2. 2

   An adviser calls you

   A licensed New Zealand adviser talks through your situation: who depends on you, what you owe, what you already have in place, and what you are actually worried about.

3. 3

   They compare the market

   The adviser quotes across the major insurers, checks which of them will take your health history on the best terms, and puts the options side by side in writing.

4. 4

   You decide, in your own time

   There is no obligation and no cost to you. If the answer is that you already have enough cover, a good adviser will tell you that.