We answer the frequently asked questions around critical illness insurance (also known as trauma insurance).
1. What is critical illness or trauma insurance?
Critical illness insurance can provide you with a lump sum payment if you’re diagnosed with certain covered medical conditions such as a heart attack, coronary bypass, cancer, stroke or a severe injury. Medical conditions, medical definitions and cover can vary between insurance policies, so it’s important to read the disclosure material like a product disclosure statement for the policy you’re considering.
Critical illness insurance usually pays a lump sum, which can be used to pay for things like repaying your debts, adjustment to housing, household expenses, medical costs above your health insurance or as source of income. People generally apply for this type of cover so they have peace of mind about having a financial safety net that could help with living and care costs if they suffer a critical illness. A critical illness payout has no restrictions on how you spend it, so it can also be used for mortgage payments, household expenses, to pay for a carer if needed, or for anything else.
In some cases, income protection insurance could pay up to 70 per cent of your usual salary or income, on a monthly basis, if you are unable to work because of injury or illness. Critical illness, on the other hand, typically pays a lump sum benefit.
This will depend on your age, family circumstances and financial situation at the time you apply for cover. The factors you need to consider include any other types of life insurances you have, whether you have private health insurance, if any government benefits would be available to you, and what type of family support you’ll have.
You can buy critical illness insurance either as a stand-alone policy or as an optional benefit in a term life insurance policy.
You generally don’t need to have a medical examination when applying for critical illness insurance but some insurers may ask you some questions about your medical history.
If you are required to answer those questions, then you have a duty to tell the insurer anything that you know, or a reasonable person in the circumstances could be expected to know, is relevant to the insurer’s decision about whether to insure you and, if so, on what terms. This duty applies when you are first applying as well as if you extend, vary or reinstate your insurance policy.
In cases where the insurer does not ask medical questions then an exclusion related to pre-existing conditions (PEC) will usually apply. This means that any condition or illness you had before a specified period prior to the policy start date will not be covered. PEC exclusions can often apply for the life of the policy.
Check the policy’s product disclosure statement (PDS) to understand any exclusions that might apply.
Generally, the cost depends on your age, gender, lifestyle and medical history. For example, premiums for smokers are higher than for non-smokers. Costs can also vary according to the policy’s features. The premiums you need to pay for your first year will be outlined in your policy.
Unlike income protection insurance, the premiums you pay for critical illness insurance are not tax deductible. But the proceeds that you receive as a critical illness insurance payout are generally not subject to tax.
To make a critical illness insurance claim the first thing you need to do is contact your insurer by phone or email. They will tell you what documents you need to provide. Usually you need to verify your claim by providing details of your policy; proof of your identity, such as a passport or driver’s licence; and details relating to your medical history. Your insurer will also send you a claim form, which will have sections you and your doctor or specialist will need to complete.
There are several reasons this may happen, including:
- an exclusion applies
- relevant information wasn’t disclosed when buying the policy
- the claim was made outside of the qualifying period.
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