This week we have a great question from the Women with Cents community.
Is it wise to have income protection if I already have trauma cover and a lot of sick leave?
Well, let’s start by understanding the difference between trauma cover and income protection. While both are types of life insurance, they do very different things.
What is trauma insurance?
Trauma insurance, also known as “critical illness”, provides cover, usually in the form of a lump sum payment, if you are diagnosed with a specified illness or injury. These policies generally include major illnesses or injuries that could have a significant impact on your life, such as cancer or a stroke, but every policy lists the illnesses and injuries differently so always check the fine print.
What is income protection insurance?
If you’re unable to work for a period of time due to illness or injury, income protection insurance (also known as IP) will replace a percentage of your income (usually 75%). While you are on a claim, payments to you are usually made monthly (similar to an income) and you are usually subject to a waiting period which can be anywhere from 2 weeks to 2 years, depending on the cover you have. You also choose a benefit period when you take out the policy, which means that whilst you are still ill or injured, your policy will keep paying you until the benefit period ends. You can choose benefit periods from a year to age 65 or even 70.
So the key differences are:
Trauma pays a lump sum while IP makes ongoing payments
A trauma claim depends on you meeting a specific listed diagnosis, whereas income protection is based on whether you are able to work or not due to your illness or injury.
So, in answer to your question I would consider the following.
How much trauma cover do you have?
It’s great that you have trauma cover. But It’s important to consider how much you have. Trauma cover is reasonably expensive, so for many people the amount of cover they have would likely only cover out-of-pocket medical expenses if they were diagnosed with a serious illness. It may not be enough to help you cover your regular expenses (like mortgage payments or rent, food and utilities) if you’re off work, which is where IP can help.
What conditions does it cover you for?
There are a lot of trauma policies available and they are not all the same. Some have very limited listed illnesses and others have a long list. What that means is, it’s possible that you may be diagnosed with a serious illness that is not listed and therefore you’re unable to claim. For example, a mental illness such as depression would not be eligible for a trauma claim, however you may be eligible to claim under an IP policy.
Do you have enough sick leave for an extended period off work?
Some illnesses can mean a long time off work, depending on the severity of the condition and the treatment. If you needed to take two years off work for example, what would be the financial impact? Would your sick leave and trauma policy be enough to cover your bills for that period of time, or would income protection be necessary?
I’d also suggest reading up on the different types of policies available to you and taking a look at our Insurance training module in our Making Cents of Money program which goes into a lot more detail on the policies available and how they work. It also may be useful to speak to a financial adviser who can help you decide on the right cover for your needs.
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