Question
Trauma Insurance vs Income Protection: What is the difference?
Answer
Trauma cover insurance is paid upon a specific diagnosis. Income Protection is paid if you are diagnosed with any medical condition or injured and can't work.
- By Willi Olsen
- Updated
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Trauma Cover and Income Protection are both living benefits and very different types of personal protection insurance, and many people ask which policy is best. Life insurance differs from trauma insurance vs income protection, which is a death benefit.
One of the benefits of trauma cover is the tax-free lump sum payment that can help those who suffer traumatic illnesses pay expenses if they cannot work. But many ask if trauma cover is necessary if they already have income protection cover.
Everyone’s financial situation is different, and we always recommend speaking to a financial advisor. In the meantime, here is some information about trauma cover compared to income protection.
Key Points
- Trauma Insurance pays a tax-free lump sum when you are diagnosed with one of the approximately 50 specific medical conditions listed in the policy.
- Income Protection pays a regular benefit when you are medically unfit to work due to any medical condition.
What is Trauma Cover?
Trauma Insurance in New Zealand provides a tax-free lump-sum payment to the insured diagnosed with one of the illnesses or medical conditions covered. Usually, somewhere around 50 different illnesses are included in the coverage.
The insurance benefit is paid upon medical proof of being diagnosed with an illness on the list of covered conditions.
The two main reasons most decide to take out trauma cover are:
- This is to help cover expenses that health insurance doesn’t pay for, such as medication, rehabilitation, and treatments not included in health coverage.
- Fill the shortfall that any income loss would incur and cover any mortgage or rent.
Trauma insurance gives you financial options because the money is paid to your bank account. You decide how to spend it.
Sarah's cancer diagnosis
Sarah, a 42-year-old marketing manager, was living a healthy and active life when she was unexpectedly diagnosed with breast cancer. Thankfully, she had purchased a Trauma Insurance policy years earlier, which included cancer as a covered condition.
Upon diagnosis, Sarah’s insurer promptly paid her a $100,000 tax-free lump sum. This financial cushion allowed Sarah to:
- Cover her out-of-pocket medical expenses, such as surgery, chemotherapy, and rehabilitation.
- Take time off work to focus on her recovery without worrying about her mortgage or bills.
- Hire a part-time caregiver to help with daily tasks at home.
Because the payout was not tied to her ability to work, Sarah had the flexibility to use the money as she needed. Even though her employer’s sick leave policy only covered her salary for a short time, the lump sum provided the extra security she needed to manage her situation confidently.
All trauma policies are not the same, but most cover the most common medical conditions and illnesses.
A partial list would include stroke, heart attack, cancer and tumours, loss of eyesight, body organ transplants and some neurological conditions such as dementia and paralysis. Trauma policies only allow one claim, however, you can upgrade your policy, upon commencement date, to claim multiple times.
What is Income Protection?
Income protection cover helps replace your income by paying you a regular payment if you cannot work due to:
- Any accident
- Any injury
- Any sickness
- Mental health or stress,
that leads to not being able to work.
With Income Protection, you can protect your income potential for two or five years or until your retirement. You are effectively guaranteeing a portion of your income for the rest of your life.
Agreed value insurance pays you based on your income when you first take out the insurance. Therefore, it is usually the more expensive of the two kinds of income protection cover.
The indemnity value benefit payout is based on your income when you claim it. Therefore, it is riskier for the buyer but also less expensive. In a worst-case scenario, you are working part-time or for less money than you used to make when you become unable to work.
Furthermore, ACC offers accident-only agreed-value disability coverage called CoverPlus Extra.
James' back injury
James, a 38-year-old builder, suffered a severe back injury while on the job, making him unable to work for several months. Fortunately, James had Income Protection Insurance, designed to replace 75% of his pre-tax monthly income during periods of disability or illness.
After a 30-day waiting period, James began receiving $4,500 monthly payments, which helped him:
- Pay his rent and living expenses.
- Maintain his car payments and utility bills without financial stress.
- Continue supporting his young family while he attends physical therapy.
The payments lasted for fourteen months until James recovered and returned to work. James and his family might have faced significant financial hardship without this safety net, as his savings would have lasted only a few weeks.
The cost difference between Trauma insurance and Income protection.
Comparing trauma insurance and income protection premiums is challenging because they provide fundamentally different types of coverage. Ideally, we recommend having both for comprehensive financial security.
Income protection insurance replaces a portion of your monthly salary if you’re unable to work due to illness or injury. Its purpose is to cover your day-to-day living expenses, ensuring you can maintain financial stability even when your income stops. Unlike life insurance, which primarily provides for your family after your death, income protection focuses on keeping your life on track during difficult times.
Even if you’re young, single, and have no dependents, income protection can be invaluable, helping you manage unexpected financial challenges, like rent or basic expenses, during a period of recovery. For those with mortgages and dependents, it’s not just useful—it’s essential, offering peace of mind and financial stability when it matters most.
Trauma insurance vs Income protection: what is better?
Trauma Insurance and Income Protection are equally important. The difference is Trauma cover insurance is paid upon diagnosis. It is not required that the person be unable to work and there is no waiting period. It provides extra money to pay expenses regardless of whether or not you are able to work.
Income protection can only be paid out when you are unable to work. Moreover, the payout is computed by taking a percentage of your earnings. In other words, it is less than you are used to taking home and is tied directly to what you earn.
Should I buy Trauma insurance and Income protection policies?
Trauma Insurance and Income Protection are equally important. The difference is Trauma cover insurance is paid upon diagnosis. It is not required that the person be unable to work and there is no waiting period. It provides extra money to pay expenses regardless of whether or not you are able to work.
Income protection can only be paid out when you are unable to work. Moreover, the payout is computed by taking a percentage of your earnings. In other words, it is less than you are used to taking home and is tied directly to what you earn.
Trauma insurance vs Income protection: what is better?
This depends on what kind of risk you are willing to live with, what kind of insurance would give you the most peace of mind, and what your budget is. Your family and your personal health history might influence the decision too.
Trauma insurance and income protection policies are fairly complex, so we strongly recommend getting unbiased advice from a LifeCovered financial advisor.
Can I get financial advice?
In my experience, no two individuals have identical needs or family circumstances, which is why tailored financial advice is essential.
Insurance plays a critical role in a strong and resilient financial strategy. It helps you stay on track toward your goals and protects your financial future from unexpected events.
Our advice process begins with a simple conversation focused on what truly matters to you. There’s no pressure to make decisions on the spot—this is a time to explore your priorities and options.
Personalized financial guidance starts with building a personal connection. As a licensed financial advisor, I’m here to provide expert, unbiased advice that fits your unique situation.
Disclaimer: The information provided is general in nature and does not constitute financial advice. Always consult a licensed financial advisor for personalized recommendations. I’d be happy to discuss your financial protection needs.
Need Help With Insurance?
Our advisers are here to answer your questions, explore your options, and help get you the right cover.