Trauma insurance – What it covers and how it works

Trauma insurance provides a one-off, tax-free payment when the policyholder is diagnosed with a covered illness or injury.

Unlike total and permanent disability (TPD) insurance, it doesn’t require proof of a permanent inability to work in your previous job—only confirmation of a diagnosis that meets the criteria in the policy. Unlike income protection, it delivers an immediate lump sum rather than monthly benefits.

Most trauma insurance policies generally cover major medical conditions, with many insurers focusing on what is commonly referred to as the “Big Four”:

• Cancer, including most types of malignant tumours, although some policies exclude early-stage diagnoses.
• Heart attack, which is a severe cardiac event that meets specific medical definitions set by insurers.
• Stroke, a significant cerebrovascular event that results in ongoing neurological impairment.
• Coronary bypass surgery, also known as open-heart surgery, is done to correct blocked arteries.

Beyond these, trauma insurance often extends to other life-altering conditions such as Parkinson’s disease, multiple sclerosis and major organ failure.

Some policies also cover traumatic injuries like paralysis or loss of limbs. Each insurer defines covered conditions differently, making it critical to review the policy wording before purchasing cover.

Trauma insurance is not tax-deductible, but payouts are generally tax-free, meaning every dollar received can be used where you need it most.

Many of us assume private health insurance, Medicare, or income protection will be enough of a safety net if we fall ill. However, each of these has limitations that trauma insurance helps address:

• Health insurance covers hospital stays, surgeries, and some treatments, but often doesn’t include significant out-of-pocket expenses for rehabilitation, specialist appointments, and alternative therapies.
• Income protection replaces a percentage of lost earnings but typically requires a waiting period before payments begin and will only cover part of your previous salary. 
• Life insurance only pays out in the event of death or terminal illness, meaning no financial assistance is provided for recovery from a serious but non-fatal condition.
• Total and permanent disability (TPD) insurance requires proof of ongoing inability to work before a claim is paid, whereas trauma insurance pays based upon diagnosis alone.

Trauma cover can help provide peace of mind and ensure financial security without the lengthy waiting periods or restrictions associated with other types of insurance.