Are All Trauma Policies Created Equal?
In my last article I discussed the various outcomes of income protection / disability claims. I recently had a colleague who experienced a stroke and who also has a trauma policy.
Trauma policies (or Critical Illness policies) take on many guises. They are lump sum policies where the insured can choose any level of cover they want (the insurance industry maximums currently sit at around $2 million).
A trauma policy will pay out a lump sum based on diagnosis of a listed medical condition or event. The policy has a measure of severity required for each condition or event that must be met for a claim to be paid.
Insurers have fallen over themselves competing to provide more and more conditions listed in the policy. Working on the basis that the more conditions they have the more superior their product must be. Many insurers now have over 60 conditions covered including Creutzfeldt-Jakob Disease (better known as Mad Cow Disease).
The list of conditions continues to grow while the reality is over 85% of claims fall into 4 major categories - Heart Disease, Heart Attacks, Stroke and Cancer.
I've often struggled with where a Trauma policy fits within a well structured risk protection programme. The problem being that the benefit is tied to diagnosis and the outcome of an event doesn't necessarily create a great cost or financial loss.
For example, I have seen people suffer a heart attack, receive a trauma claim and be back at work fulltime inside 6 months. Given they also had medical insurance and income replacement insurance there was no significant financial imposition on them or their business.
So, in some respects it could be viewed as a “Lotto” Benefit where there is this sudden cash windfall in the event that something unexpected and terrible has happened.
Problems can arise where Trauma cover is written into a Partnership or Buy / Sell Agreement. If the Agreement triggers a sale of shares because the insurance payment has been triggered this may not suit the long term planning of the claimant. Or in other words, an obligation to sell out of the practice when they are capable of returning to work is probably not the intended outcome of the initial Buy/Sell agreement. So, it is important that care is taken when considering the use of this type of cover in a business sense.
Other limitations I have seen with Trauma Cover are:
- The definitions are very strict. All conditions
have a recognizable gradable measure. Often to qualify
requires meeting the severest stage of a condition. This
can mean that there is no claim on initial diagnosis and
a claim is deferred until the condition worsens.
There have been some policy options introduced to overcome this like an Early Cancer up grade but this is a restricted benefit and only in respect of one category of claims.
- The premiums escalate very quickly
as we age. For a male at age 40 $100,000 of cover is
approximately $450 per annum. This rises to $1,150 at
age 50, $3,300 at age 60 and $9,400 at age 70. So in the
ages where claims are most likely to occur premiums are
becoming a barrier to maintaining cover.
- Despite there being over 60 conditions the policy will only pay out once. Yet there are many people who have multiple incidents.
Sovereign recently launched a new product in the Trauma Cover arena to try and address some of these concerns.
"Progressive Care" - has taken a different approach. It has divided over 60 conditions in to 5 broad categories. These are; Heart and Arteries, Brain and Nerves, Cancer, Loss of Function, Other Health Events.
They have also set thresholds for each condition where the benefit payable can be either 25%, 50%, 75% or 100% of the sum assured depending on the severity of the condition. This means there will be some claim payable at earlier stages of an event.
In respect of Cancer and Other Health Events there is even a 10% benefit payable.
If a benefit of less than 100% is paid the policy still remains in place and any future claim in that Category is limited to the percentage that hasn't previously been paid. For example, if you had a heart attack and a benefit of 50% was paid then any future claim in the Heart & Arteries Category would be limited to the remaining 50%.
In respect of the other 4 Categories a further claim could still be made for the full sum assured of the policy.
Surprisingly, the premiums are lower. For a male age 40 a benefit of $100,000 is only $320 per annum. At age 50 this has risen to $840, by age 60 the annual premium is $2,400 and at age 70, $6,700.
So, Progressive Care has addressed many of the concerns with Trauma Cover. In our view it still complements and supplements a well structured protection plan but it certainly has more appeal given its flexibility and practicality.
If you would like further information on this innovative cover you can contact NZDIS.