When to Take Out Income Protection, TPD and Trauma Insurance

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Other than death cover there are three major types of personal insurance cover that you can purchase to manage the risks associated with injury, illness, permanent disability and medical emergencies. Each has an important part to play in a personalised risk management strategy.

  • Income Protection insurance provides you with a regular income for the period you are unable to work due to serious illness or injury.
  • Total and Permanent Disability (TPD) insurance which provides you with a lump sum payment aimed at providing you with ongoing financial support as a result of a total or permanent disablement.
  • Trauma insurance which provides you with a lump sum payment aimed at supporting you financially as a result of being diagnosed with a qualifying illness.

Income Protection Insurance provides you with a regular income stream should you suffer an illness or injury and be unable to work. Your insurance policy will likely pay a monthly amount of up to 75% of your gross salary for an agreed period or until you are well and able to return to work. It is offered with both a benefit period (the maximum period of payment) and a qualifying period (how long you wait for the first payment).

It is important to note that Income Protection and Workers Compensation are quite different. Workers Compensation covers the costs where the injury was suffered at work. Income Protection provides you with a regular income stream for an injury or illnesses that are unrelated to your work.

Keep in mind that not all income protection policies are the same. The varying benefits, features, options and even definitions affect the costs dramatically. The combination of personal information, your agreed benefit period and agreed qualifying period will also affect the cost of income protection cover. As a guide, income protection can cost around one week’s salary per year (and can be tax deductable in qualifying countries).

Total and Permanent Disability (TPD) Insurance provides you with an agreed lump sum in the event that you become totally or permanently disabled during the term of the TPD insurance policy.

A disablement that prevents you from earning a regular or replacement income can place a huge financial burden on your family and lifestyle. The additional costs associated with adjusting and managing the disablement adds to this financial stress.

Remember that your TPD insurance needs will vary over time and should be reviewed at least annually.

Trauma Insurance or Crisis Recovery Insurance pays you an agreed lump sum if you are diagnosed with one or more serious medical illnesses. The policy will specify the illnesses that are covered and may differ from one policy to the next. Although most Trauma insurance policies pay immediately on an accidental trauma, it is important to note that generally a Trauma insurance policy has a qualifying period, normally 90 days.

Unlike Income insurance, Trauma insurance will only be paid on the diagnosis of a qualifying illness. Consider a specified illness (e.g. cancer) where you are diagnosed but are able to work. In this case you may not be eligible for Income insurance but you would receive a lump sum through Trauma insurance. However, if you are not working then Trauma insurance would be the only option available.

There are a number of qualifying requirements and options available when it comes to Trauma insurance. Generally pre-existing conditions are excluded from the specified illnesses. Options can include the possibility of structuring a policy such that it minimises the risk for multiple lifetime medical illnesses or alternatively the policy can be in place as a once off event.

Remember that term life insurance only addresses terminal illness and death. Thankfully many of life’s hazards do not result in such dire outcomes. Injury, illness, permanent disability and medical emergencies are other potential outcomes that need to be considered carefully.

Recent research showed that 70% of a workforce is likely to suffer from a long-term medical condition as a result of sickness and accident, which lasts six months of more. How would you cope financially if this happened to you? Make a short list of the financial impacts and then complete a financial Risk Assessment for you and your family. This may highlight some concerns and reasons for having the right cover in place.

The field of personal risk insurance can be confusing and therefore worth speaking with a qualified personal risk adviser before making a decision.

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