What is terminal illness insurance?

What is terminal illness cover?

Terminal illness cover is also known as trauma insurance, critical illness cover or recovery insurance. It pays a lump sum to you if you suffer a critical injury or serious illness, like cancer or a heart condition. Terminal illness insurance does not cover mental health conditions.

The specifics of covered conditions will vary by provider so it's important to always read the product disclosure statement (PDS) to understand the inclusions and exclusions.

What can terminal illness cover help pay for?

Terminal illness policies are paid out in a lump sum and you're not obligated to spend it on any one thing — it's up to you to choose how to spend it. Most people tend to use it to cover the following:

• Household expenses. The mortgage, bills, childcare, groceries. Anything that becomes difficult to pay for when your capacity to earn money is gone.
• Medical costs. For example, if your illness requires an in-home nurse or substantial out of pocket hospital costs.
• Necessary home renovations. For example, the installation of wheelchair ramps, railings or widened hallways.

Ultimately, it's up to you and your family to spend this money in whatever way it's needed.

How to buy terminal illness insurance

Terminal illness — also known as trauma insurance — can be bought as a standalone product or as part of a life insurance policy. There are two main channels for this:

1. Direct through an insurer. Standalone terminal illness insurance can be purchased directly through some insurers. It can also be bought as part of a life insurance policy, which can also be arranged directly through the insurer.
2. Via a broker or financial advisor. Again, this policy can be bought as a standalone policy through a broker or as part of a life insurance policy, purchased via a broker.

Super funds no longer offer trauma insurance policies, however they do offer life insurance policies and trauma can usually be added as an optional extra.

How do terminal illness insurance premiums work?

There are two ways you can structure your terminal illness insurance premiums:

Stepped premiums: This is when your premiums increase as you age. So every year, at policy renewal time, your annual premium is re-calculated. As you get older, you're at higher risk of making a claim, so your premiums increase in line with this risk.

Level premiums: This is when your premiums stay the same despite your age. You'll typically pay more for your premium than necessary while you're still young, but as you age and your premiums stay the same, you'll likely be paying less per year than you would have if you had opted for stepped premiums.

Some insurers offer both options, others only offer stepped premiums.

What's right for you will depend on how old you are when you take out the policy, your health and your personal financial circumstances. If you're unsure of what to book, a broker could help you make this decision.

What to look for when purchasing a terminal illness policy

Terminal illness policy can vary quite a bit in terms of what's covered and benefit limits. Here's what to look out for.

• The terminal illnesses that are covered. Be sure to check the insurer's website or PDS to understand what you're covered for.
• Exclusions. Just as it's important to know what is covered, it's also important to know what isn't covered. You'll find this information in the PDS.
• Waiting periods. This refers to the time you have to wait before you can start collecting benefits. Be sure to understand how waiting periods work so you can select one that best meets your needs.
• Benefit limits. Every benefit has a limit associated with it. Be sure that enough cover is offered on the benefits you care most about. For example, some funeral benefits have a limit of $25,000 while other providers have a limit of $15,000.
• Stepped or level premiums. Check how the insurer structures their premiums as this will affect the cost you pay both now and in the future.
• Claims data. When choosing a provider, it can help to know what their claims approval rating is. We prefer to look at the following information: claims acceptance rate and average claim time in months. Understanding the industry average and seeing where prospective providers land among this can be helpful information when making your decision. This information can be found via Moneysmart's claims comparison tool.

FAQs

• What is considered a terminal illness for insurance?

  The conditions that are covered will vary by insurer. Typically, it's a condition that can't be cured and is likely to lead to death. You can expect to see things like advanced cancer and heart disease.

• Can you get critical illness cover after having cancer?

  This would depend on the insurer, but you'll likely find it very difficult. It'd be classified as a pre-existing condition and you'd have to disclose it. It could be worth discussing your options with a broker or financial advisor.

• Will life insurance pay out for terminal cancer?

  If your life insurance policy includes cover for critical illness, which is sometimes known as terminal illness cover or trauma cover, then yes - it should pay out for a terminal cancer diagnosis.