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Trauma insurance vs income protection insurance: Choosing your financial safety net

Explore the differences between trauma insurance and income protection. Learn which option will suit your financial needs during illness or injury.

5 min to read

Insurance plays a crucial role in safeguarding your economic wellbeing during times of uncertainty. When an illness or injury hampers your ability to work, two types of insurance are worth considering: trauma and income protection. In this comprehensive guide, we'll explore the key differences between these insurances, what they are, and how they work, helping you make an informed decision that aligns with your specific needs.

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Learn more about different types of insurance from a licenced financial adviser and see what's best for your circumstances.

Health | Life | Trauma | Total and Permanent Disability | Income Protection

What is trauma insurance?

Trauma insurance is designed to offer a lump sum payment on the diagnosis of a critical illness or specified medical condition as defined in the policy wording, allowing policyholders to cover immediate expenses, such as medical bills, mortgage or rent payments, and other unforeseen costs.

Covered conditions 

Trauma insurance primarily focuses on specific critical illnesses and conditions, which might include but are not limited to:

  1. Cancer: Many trauma insurance policies cover some forms of cancer.
  2. Heart attack: A heart attack diagnosis often triggers a trauma insurance payout.
  3. Stroke: Trauma insurance may offer financial support when a policyholder experiences a stroke.
  4. Organ failure: In cases of major organ failure, such as kidney or liver, trauma insurance can be vital.
  5. Surgical procedures: Some policies cover specific surgeries like organ transplants.

Payout structure

  • When diagnosed with a covered condition, policyholders receive a lump sum payment according to the sum insured.
  • This lump sum can be used at the policyholder's discretion to meet various financial needs.

What is income protection insurance?

Income protection insurance safeguards your financial stability by providing a regular income if you're unable to work due to illness, injury, or disability. During these periods of reduced or no income, it ensures that you continue to receive generally up to 75% of your income, helping you uphold your living expenses, bills, and other financial commitments. Income protection is especially valuable as it enables you to maintain your standard of living and focus on your recovery without the added stress of financial hardship.

Covered situations

Income protection offers a broader scope of cover, extending to a wide range of health-related scenarios, such as:

  1. Illness: Covers you for all illnesses that prevent you from working in your current occupation.
  2. Injury: If you're injured and unable to work, income protection works in well with ACC (Accident Compensation Corporation).
  3. Disability: Covers you if you are totally and permanently disabled. Can provide an ongoing income right until retirement.

Payout structure

  • Instead of a lump sum, income protection policies offer regular payments of up to 75% of your income to support ongoing financial needs.
  • These regular payments continue until you recover and return to work, or until the policy's benefit period expires. You can take out cover that protects you right up until retirement or age 70 - your choice.

Key differences: Trauma insurance vs income protection

  1. Payment structure: Trauma insurance provides a lump sum upon a diagnosis of a covered condition, offering immediate financial relief. Income protection offers ongoing payments during your recovery providing your disability meets the definition under the policy.
  2. Covered conditions: Trauma insurance covers specific defined medical conditions, while income protection extends to all medical events or conditions that stop you from working in your current occupation.
  3. Immediate vs ongoing needs: Trauma insurance addresses immediate financial needs arising from your diagnosis, such as medical bills and mortgage payments. Income protection ensures ongoing financial stability by regularly replacing a high percentage of your income while you cannot work.

Choosing the right option

Making an informed choice between trauma insurance and income protection depends on various factors, such as your personal circumstances, financial responsibilities, family situation, long-term financial goals, and risk tolerance. A Policywise adviser can recommend the best cover for you and our service is fast and completely free. Check out our reviews to see how we’ve helped others.

In the meantime, here are some considerations to help guide your decision:

When trauma insurance makes sense

  • Trauma insurance can be a valuable choice if you want immediate financial support upon diagnosis of a critical illness.
  • If you have a family and want to ensure that your immediate expenses, such as mortgage or rent, are covered while you focus on recovery.

When income protection is the right fit

  • Income protection is a sensible option if you're concerned about maintaining your regular financial commitments, such as groceries, utilities, and everyday expenses, during an illness or injury.
  • When your career or job involves a higher risk of illness or injury, income protection can provide ongoing security.

For many people, it’s practical to have both products in place with the correct sum insured for your situation. Speak with a licensed adviser for the best support in making your decision.

Why work with Policywise?

Policywise is a 100% free service which tells you which health, life, and disability insurance provider best fits your needs. We offer fast, comprehensive, and easy-to-understand comparisons of all leading providers, and a simple summary clearly recommending which insurer is best for your situation.

Not all insurance policies are the same. Policywise can help you sort out the duds, avoid the lemons, understand the fine print and exclusions, and get the right insurance for you and your family.

We make the important decision of where to buy your insurance super easy. We’ll answer your questions, provide experienced advice, quotes, and comparisons, and manage all the back and forth throughout the application process. Taking out your cover through us means you'll have our lifetime support and claims advocacy, and we'll help you negotiate a positive outcome at claim time. We can also take care of lodging any claims on your behalf and back you up if the going gets tough.

Check out the reviews on our homepage for how other New Zealanders have found our service because now is the time to get your trauma insurance or income protection insurance sorted. Give your family or someone you love the most outstanding financial support possible. Book a 5-minute callback with Policywise today; our service is fast and free.

Conclusion

Trauma insurance and income protection insurance serve two distinct roles in your financial set-up, each offering a valuable safety net in the face of health challenges. While trauma insurance provides immediate financial assistance upon the diagnosis of specifically defined conditions, income protection ensures ongoing financial stability. These options should align with your individual needs and financial objectives. Remember, Policywise provides support and resources to help you make well-informed insurance decisions. Whether you opt for trauma insurance or income protection, or both, your financial wellbeing is in capable hands.

Disclaimer: This article is for general information only. Nothing in this blog or on this website is intended as medical, dietary, or financial advice. Although Policywise aims to update our content regularly, you are advised to consult a financial adviser, health professional, or an appropriate specialist before acting on any information herein. They can factor in your personal circumstances or preferences and help guide your decision-making process.

Quickly find the cover that’s best for you

Policywise tells you which health, life or disability insurance best matches your circumstances, 100% free. Talk to one of our insurance advisers to find out which health or life insurance is best for throat cancer, and other serious illnesses.

References

Aussie Injury Lawyers. What Is Trauma Insurance? The Essentials of Trauma Cover. Retrieved 11/4/2023 https://aussieinjurylawyers.com.au/legal-news/what-is-trauma-insurance/

LifeCovered NZ. Olsen, Willi. Trauma Insurance vs Income Protection: What Are the Differences? Retrieved 11/4/2023 https://www.lifecovered.nz/trauma-insurance-vs-income-protection/

The Conversation. Tania Driver. What Is Trauma Insurance and What Do I Need to Know If I Am Considering Getting It?  Retrieved 11/4/2023 https://theconversation.com/what-is-trauma-insurance-and-what-do-i-need-to-know-if-i-am-considering-getting-it-199104.

Money Helper UK. What Is Income Protection Insurance? Retrieved 11/4/2023 https://www.moneyhelper.org.uk/en/everyday-money/insurance/what-is-income-protection-insurance 

Suggested readings

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AIA NZ Health Insurance - Helping Kiwis Enjoy Healthier Lives

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