Understanding trauma and critical illness insurance

Living insurance (also known as trauma insurance) is designed to pay you a sum of money if you are diagnosed with a potentially life-threatening illness, or experience some kind of trauma. A benefit may be payable if you suffer from a specified medical event. 

How living insurance works

If you are diagnosed with a serious illness such as cancer, your private health insurance or the public hospital system may cover some of your medical costs. 

However, in many cases your treatment may require a long-term process before you’re able to return to work. As a result, this could place significant financial strain on you and your family in being able to cover day-to-day expenses. Receiving a large sum of money from your insurance could therefore help to alleviate this pressure.

Benefits of living insurance

Lump sum exempt from capital gains tax

One of the main benefits of living insurance is it enables you to access a lump sum amount as opposed to a regular monthly income stream that you’d receive via income protection insurance.

The lump sum amount will be exempt from capital gains tax if you hold the insurance personally. It also means that you generally do not have to include the lump sum payment in your assessable income for tax purposes.

Can be covered for a range of conditions depending on policy

The range of conditions covered under living insurance include things like heart attack and other organ disorders, major head trauma, loss of speech and degenerative diseases like Multiple Sclerosis and Parkinson’s.

Ability to change the amount of your cover

You have the option to apply for additional cover when certain events occur without the need to provide any additional medical evidence.

No restriction to how you use your money

The amount that you receive from your living insurance can be used for whatever purpose you see fit whether that’s to clear yourself of debt, pay for your medical expenses, or just take a holiday, the choice is yours. 

Drawbacks of living insurance

You must survive the illness for a set period to make a claim

One of the main drawbacks of living insurance is that in order to receive a payout you must survive the illness for a set period of time. This period can range from two weeks to a month from when you are first diagnosed, depending on your policy and insurer.

Not accessible through super

While you can access a range of different types of insurance through your super, living insurance isn’t one them. This means that you won’t be able to access some of the benefits that having insurance through super offers such as tax concessions.

You must have had your policy in place to make a claim

In some instances, you can only make a claim if you’ve had your insurance policy in place for a set period of time. This is typically 90 days from when you first purchase your policy.

Deciding on your level of cover

If you’ve made the decision to take out living insurance, speaking to a financial adviser may help you in deciding which policy would be best and the level of cover you may need.

If you choose to undertake this process yourself, consider how your family would cope if you were diagnosed with a serious illness and the amount of money you would need to get by. There are insurance calculators which may help you in determining this.

Bottom line: Living insurance may help to alleviate financial worry if you become too sick to work or have medical bills to pay. While your lump sum payout can be used as you wish, there are some drawbacks so it may be worth speaking to a financial adviser to ensure your policy meets your needs.

Next: eBook: A guide to navigating serious illness or injury

This guide has been created to help provide emotional, physical, social and financial support for people who are suffering serious illness or injury all in the one place. It’s also to help the many carers who provide invaluable support to those who are experiencing these conditions. 

See the various types of insurance available
The time may come when you need to make a claim on your insurance. We explain why you may need to make a claim and what you can expect at each stage.
Discover the potential benefits insurance may offer in protecting you and your family against financial hardship and fiscal stress when the unexpected occurs.
Knowing which types of insurance to select depends on your circumstances. We explain what to look for.

This article was prepared by BT. BT is a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714. This information is current as at 1 July 2019. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.           

This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. BT cannot give tax advice. Any tax considerations outlined above are general statements, based on an interpretation of the current tax law, and do not constitute tax advice.