Is trauma (critical illness) insurance worth it? Benefits, limitations and buying options

What is trauma insurance, and what does it cover?

Trauma insurance (also called critical illness cover) provides a tax-free lump sum payment if you suffer a serious medical condition covered by your policy. 

Unlike health insurance, which only pays for specific medical expenses, trauma cover offers complete flexibility. You can use the payout as needed, whether for treatment, mortgage or rent payments, household bills, or taking time off work to recover.

What does trauma insurance cover?

Trauma insurance offers financial support for a wide range of serious illnesses and medical conditions, including:

• Cancer: One of the most commonly claimed conditions, including breast, bowel, and lung cancer
• Heart conditions and procedures: Heart attack, coronary artery bypass surgery, and other major cardiovascular issues
• Neurological conditions: Stroke (a leading cause of disability in New Zealand, often requiring long-term rehabilitation), Parkinson’s disease, Alzheimer’s disease and other dementias, multiple sclerosis, and motor neurone disease
• Other conditions: Chronic organ failure (kidney, liver, or lungs), organ transplant, terminal illness, loss of limb, blindness, and severe rheumatoid arthritis.

Does trauma insurance cover my kids?

Yes, trauma insurance can cover your children if they are diagnosed with a policy-defined critical illness. Many plans have a complimentary child’s trauma benefit, with a few insuring kids as young as three months until they turn 19-23 years old. 

Benefits under the built-in child trauma cover vary per insurer. Several plans provide a percentage of the sum insured up to a maximum of $50,000. If you would like to increase this cover amount, a Policywise adviser can help you find and compare trauma insurance options for children. 

Do I need trauma insurance?

Trauma insurance is worth considering if you have dependants relying on your income, large debts to repay, or minimal savings. It provides a tax-free lump sum if you’re diagnosed with a serious illness, like cancer, a heart attack, or stroke - significant health issues that ACC won’t cover.

What happens without trauma cover?

Imagine this: You’re a working parent with a mortgage, bills to pay, and a young family depending on your income. One day, you feel unwell and visit your doctor. After several tests, you receive a diagnosis: you have an aggressive form of cancer.

Without trauma insurance:

• Your funds cease while you take months off work for treatment without sick leave or income protection.
• Your partner might have to take extended or unpaid leave or quit their job to care for you, doubling the financial strain.
• Medical expenses, specialist appointments, and potential out-of-pocket costs for unfunded treatments quickly drain your emergency savings.
• Your mortgage repayments are no longer manageable, and you risk losing your family home.
• Everyday expenses - food, utilities, school necessities - become overwhelming, forcing you to rely on family, loans, or even selling assets.

Now imagine your child is diagnosed with a serious illness:

• You and your partner take turnabout leave, but extended unpaid time off puts your jobs at risk.
• Medical costs add up, including specialist consultations and hospital stays.
• You can’t afford alternative treatments or private healthcare, limiting your child’s options.
• The stress of having a sick child as well as financial issues takes a toll on your mental health and wellbeing.

How trauma insurance benefits can help

• Financial security: The tax-free lump sum covers medical expenses, mortgage repayments, and everyday costs.
• Work flexibility: You can take time to recover or care for your child without worrying about lost income.
• Treatment options: Use the funds to pay for private specialist consultations,  non-Pharmac-funded drugs, or international medical care.
• Peace of mind: Focus on healing instead of financial hardship.

What are the limitations and disadvantages of critical illness/trauma insurance? 

While trauma insurance provides valuable financial protection, it does have limitations. Here are some drawbacks, with tips to address them:

1. Not all illnesses are covered

Trauma insurance only covers specific medical conditions which meet the criteria stated in your policy. While major illnesses, like cancer, stroke, and heart attacks, are typically included, some early-stage conditions or rare diseases may not qualify for a payout.

TIP: Compare policies carefully as cover varies between insurers. Always read the policy wording to understand what’s included and excluded.

2. Doesn’t cover death

Unlike life insurance, standalone trauma cover does not pay out if you pass away, meaning your family will not receive financial support if you die. 

TIP: Consider life insurance alongside trauma cover. You can either buy a separate life insurance policy or add trauma cover as an accelerated benefit, reducing your life cover amount if you make a trauma claim. 

3. Some trauma insurance plans only pay a one-time lump sum benefit

After you have claimed on your trauma insurance, your cover may end because some policies pay a lump sum benefit only once, leaving you vulnerable in case you suffer another critical condition.

TIP: If you prefer a trauma insurance plan that keeps you covered even after you’ve made a claim, consider adding a trauma buy-back or reinstatement option or buying a trauma multi-cover or progressive plan.

What are my options for buying critical illness insurance?

Depending on your needs and budget, you have several options for purchasing critical illness insurance in New Zealand. 

1. Standalone trauma cover

This is a dedicated policy that provides a lump sum payout if you are diagnosed with a covered critical illness or injury. 

• Pro: It does not affect your life insurance cover amount, meaning your family can still receive the full life insurance payout if you pass away.
• Con: It only pays out if you suffer a policy-covered critical illness or injury. Standalone trauma cover does not pay out if you pass away.

2. Accelerated trauma cover

This option links trauma cover to your life insurance policy, meaning if you claim for a covered condition, your life cover is reduced by your trauma claim amount.

• Pro: You are covered for both critical illness and death, offering broader protection for you and your loved ones.
• Con: Your loved ones will receive a lower life insurance payout if you pass away after you’ve made a trauma insurance claim. 

If you want to be able to reinstate your life cover in case of a trauma claim, consider adding a life cover buy-back or reinstatement benefit to your policy. Talk to an adviser to learn more about the benefits and limitations of these add-ons.

3. Convert group trauma to individual cover

If you have trauma insurance through your employer, you may lose this cover if you leave your job. Some insurers allow you to convert your group trauma cover to an individual policy, ensuring you remain protected. 

4. Options to make multiple claims

Some trauma insurance plans pay out only once, and your policy ends after you’ve made a claim. This leaves you without any cover in case you suffer another critical illness. 

To ensure ongoing protection, consider:

• adding continuous trauma or a trauma buy-back benefit to your policy, which reinstates your trauma cover if you make a claim, or
• buying multi-cover or progressive trauma insurance products, which are specifically designed to provide lump sum payments for multiple critical conditions.