Trauma Cover: Are we thinking things through or just doing what we have always done?

Being the first of the new insurance options, we stepped away from whole-of-life and endowment as the solution to all problems.

I've seen several approaches to provisioning trauma cover over the years, with varying degrees of success.

Some things we need to consider as constants.

We hear in insurer updates that trauma cover needs to be sold. We need to sell more of it in various forms that provide a graduated response, because clients often lack sufficient cover when critical conditions arise.

Hmmm... I'm not buying the sales pitch here. The pitch doesn't align with the stats when you factor in human behaviour and experience.

Let's stop for a second and look at what trauma is being used for:

When I step back from all of this, I'm hit with a perspective that we may not be reading the tea leaves well.

When we consider budgets and behaviour, if people are cancelling cover at an average age of 47, it's not because the risk issues have been resolved or claims are being paid. It is budget pressure.

We know clients often have a knee-jerk reaction to premiums. When premiums get to a certain threshold, they call the insurer and cancel it.

When we consider that the average claim is $90,000 - $140,000, this does not mean they don't have enough coverage; it means they can't afford more coverage.

Which means we have a logical fallacy at play. In the early years, we advise repayment of mortgages; yet by the time the average claim is paid, it doesn't even touch the average mortgage.

This raises the question: why are clients spending so much on premium coverage that ultimately gets cancelled or removed?

Sales and commission. The sale is easy, and thus the commission earned is higher. I know that's a crass statement, but we need to consider motivation in this context.

If the average claim is in the 40s and 50s, and premiums are too expensive to hold coverage for mortgage debt, why do we continue to advise insuring mortgage debt?

I agree that high-interest debt, like credit cards and car finance, should be cleared here; high-interest debt out of control can be damn hard to manage. However, the quantum of value for this is distinctly different from lower-interest debt, such as mortgage debt.

In an ideal world, people would be able to afford coverage for mortgage debt; also, in a perfect world, they wouldn't need a mortgage either.

When we consider mortgage debt in conjunction with income protection coverage, the need for trauma cover for this purpose drops away. If the person can't work, their disability cover pays; if they can work, they can pay.

The real issue here is when it gets to the point of being total permanent disability, this is where telephone numbers for TPD should be used, as it's far more cost-effective to hold into your 50s and 60s.

In terms of expenses such as education, private education should be covered by disability insurance, as it is typically expected to be paid from present income without requiring a critical condition or disability. Provided you haven't got a very high earner, where replacement ratio limits have been hit. This is stratosphere earnings affecting about 0.66% of people in NZ, so a lesser issue than most think.

If it is for tertiary education, clients are better off using the student loan scheme and putting their money into an investment. When the student loan scheme only requires repayment when earning above the income threshold and is forgiven upon death, there is almost no requirement to repay it, and parents should use the money they set aside more effectively.

This risk should be addressed if parents are supporting their child once they qualify to repay their student loan and manage it accordingly.

If the kids disappear overseas, then there is interest charged, and at the same time, they are required to repay it. This is repaying it from inflation-adjusted earnings, meaning the value of the debt being repaid is less than the value of the debt when it was taken.

And to answer the usual "but it's responsible to repay it". Umm, sure, but we're typically talking higher earners who have already paid relatively significant levels of tax. This is one of those balancing-the-books things with the tax system.

A few things I have heard in more recent times, selling trauma cover over disability and medical covers:

With disability, the answer to "the budget" is a better understanding of your products.

With medical, "but there are gaps". Sure, there are some fringe cases where medical policies won't cover things, but at the same time, the ones I have seen aren't trauma claims either.

But medical is expensive. Sure, so is not being able to access your health care in the public system. Without significant funding, people aren't avoiding the public system.

Again, maintaining a medical policy with hospital-only coverage and a reasonable excess is substantially cheaper than trauma cover, providing sufficient coverage.

I can go on, and on, and on, but I won't.

The message is we need to be smarter about what we are doing.

Selling life and trauma cover because we're too lazy to do the rest, with education for both the clients and ourselves, is not what we're about. It's not what the regulator, government, and ultimately society expect of us.

The message with the new rules and revised code of conduct is that we need to do better. You can say you are, but when was the last time you road-tested your own advice?

Like I have been saying about insurance companies, we must leave the office and look back to reflect on what we are doing, how we are doing it, and how we can improve.

Comments from our readers

On 10 September 2025 at 11:20 am OldRisky said:

Thanks for the article. Some additional thoughts that come to mind around the use/need for trauma are:
- Ability for partner to take unpaid leave from work to support and care for the recovering partner
- Providing financial protection for a non-working customer who would be ineligible for IP cover and occupational TPD
- For conditions such as cancer often it is about having fund available into the future as well for lifetime ongoing testing and drugs out of pocket expenses

On 11 September 2025 at 8:43 am Backstage said:

@JP, You could go on :)? Income protection is a multi-claim product and is a defined exclusion product as opposed to a defined benefit (Trauma) product. With defined exclusion, there is broader coverage.

Trauma is a lovely product, but as much science as we could apply to dream up the right number for a client's circumstance, premium is always the issue, and it always will be.

Ensuring clients understand what they are buying with trauma should also be a priority. Those selling severe trauma products should probably give their clients a product accreditation test each year.

On 11 September 2025 at 9:27 am Steve Wright said:

As I see it, the 'difficulties' some have with various products (so they never recommend them) have is due to insufficient identification and isolation of client risk.

Suitable advice and product recommendations depend entirely on proper identification and quantification of all risks faced by clients and then making recommendations to cover those risks adequately and efficiently (not paying more than necessary).

Affordability issues will often require a trimming back of cover but that is a subsequent exercise and should always be at the request of the client with full understanding of the consequences.

For me, the financial risk associated with suffering a serious illness and which requires insurance protection, is not amorphous and undefined.

We now have insurance solutions which allows the separation of trauma risk into multiple different financial risks (each of which will differ depending on client circumstances and likely change over time), allowing more suitable, flexible and premium efficient, client options.

On 12 September 2025 at 11:05 am JPHale said:

@OldRisky good ideas, and I include household income in the initial advice discussion to cover off 2 aspects:
1. The client is not taking disability cover and just going with trauma cover, which is very rare for them to make this decision.
2. To ensure that there is a discussion about the partner's income. Though if they have income protection, they usually have a level of dependent caregiver provided for (4/5 insurers). Where this is more acute is for part-time and homemakers, where IP isn't a reasonable option.

I typically reserve the larger long-term replacement of income bit for declines on disability cover and first use one of the specific injury covers first, historically trauma has been the answer here.

The cancer bit, I'm seeing people running out of money with the trauma-only approach; medical insurance is the better vehicle for this.
- There is the "overseas" experimental treatment argument here; the reality is a fringe issue that happens rarely by % risk, in the area of extreme justification.

On 12 September 2025 at 11:06 am JPHale said:

@Backstage, I could go on, I do have a word limit that I treat as a guideline... ;)

On 12 September 2025 at 11:11 am JPHale said:

@Steve, I agree; the problem can be well-defined, and we can come up with telephone numbers.

As others have concurred, the issue is more budget-related than a lack of understanding or a low cover level recommendation.

When I have taken the approach of significantly higher trauma sums with client presentations, without fail, they have pulled trauma back in the same way once the full discussion of risks has been had. The reason: budget.

Once clients understand the access to medical treatment, loss of income, and catastrophic but unlikely life cover claims, they list Trauma as number 4 in the priority order. And their budget for insurance is both limited and surprisingly related to their incomes, in a pretty consistent way, as a % of total earnings.

On 12 September 2025 at 11:16 am Paul Flood said:

@Steve You write “the financial risk associated with suffering serious illness and which requires insurance protection is not amorphous and undefined”, and that modern insurance solutions allow “more suitable, flexible, and premium efficient, client options”.

To paraphrase Aristotle, we must not expect more precision than the subject matter allows. Some risks are easier to identify and quantify, and some product designs align nicely with the risk to afford a higher degree of precision when matching problem and solution. And sometimes the nature of the triggering event itself allows more precise quantification of loss.

Death has an inevitable finality. No prospect of recovery and return to an income-producing role. No unknown future medical expenses. A lump sum product fits nicely here.

Disability. There is a high prospect (although not certainty) of returning to an income producing capacity. A product with the flexibility to replace income totally or partially, and only during the period of disablement, fits nicely here.

Health issues requiring medical treatment. As with disability, we have products that expand to meet the loss, within benefit limits. A product that indemnifies loss incurred from medical expenses as opposed to lost income. Round holes, roundish pegs.

But by and large, trauma cover products as currently designed are square pegs. The unknown, amorphous, and undefined nature of the future serious illness makes identifying and quantifying potential loss extremely difficult. Indemnity products make our job easier and provide some certainty. On the other hand, a lump-sum trauma claim can be triggered by an event causing little to no loss (a heart-attack/acute-care-in-public-system/return-to-work-a-month-later scenario). Or by a catastrophic event (serious-stroke-causing-total-loss-of-future-ability-to-earn-an-income-and-imposing-significant-ongoing-care-costs scenario).

Severity-based trauma solutions (single or combined product variants) are a move in the indemnity direction, but imagine how much easier an adviser’s job would be if there was a true indemnity solution that was affordable (could be scaled to budget). Whatever the gap, the trauma solution would respond to restore the client’s position.

In the (understandable) absence of such a solution, why isn’t “I recommend as much you can afford for as long as you can afford it” perfectly acceptable when addressing trauma cover needs? (Not a rhetorical question.)

On 15 September 2025 at 3:12 pm Steve Wright said:

Paul Flood. excellent comment. If you’d like to debate some of this stuff offline, DM me your e mail address/tel no on LinkedIn and we can do that.

The type of ‘indemnity’ trauma product easier for advisers to recommend that would respond to whatever the client needed, would come with its own difficulties, particularly with justifying the ‘indemnity amount to be paid at claim time’ and would still require a sum insured’ maximum (insurers don’t like and can’t price for indeterminable risk).

I'll answer your 'not rhetorical question in due course.

On 16 September 2025 at 12:50 pm JPHale said:

Thanks Paul, excellent comment.

And I agree, the trauma approach of throwing as much as possible against the wall is a valid approach. Not necessarily my ideal, but it also has its place where there is budget and reasonable risk concern.

My caveat to that would be, where's the wealth plan alongside that?

Because we know the long-term cost will be prohibitive, and being broke in retirement, because you spent it all on insurance, when you're one of the 60-70% that don't qualify for a trauma claim, isn't ideal either.

On 17 September 2025 at 11:18 am Paul Flood said:

Thanks JP, this is exactly the answer I was hoping to elicit with my non-rhetorical question, and touches on an important issue that I don’t often see discussed.

The expected value to a client of every $1 spent on insurance is less than $1.

Which of the following, if adopted as the starting point for every recommendation, would be more likely to result in advice that satisfies duty 431K (to give priority to a client’s interests)?

1. Carry as much cover as you can afford for as long as you can afford it.
2. Only carry as much cover as you need and don’t hold it longer than you need it.

I think the correct answer should be: Neither; it is not the adviser’s role to select the level of risk that a client should be willing to tolerate. The starting point should be questioning designed to tease out and stress test the client’s risk tolerance (thank you Jeff Bailey).

As you point out, while informative, messaging from insurers shouldn’t be taken as gospel. Such messaging has the potential to infiltrate the earliest discussions with clients, skewing the results of any risk-tolerance assessment groundwork. “How would your household manage if one of you suffers a second unrelated critical illness within 12 months of the first?”

Using your example, recommending a 47yo male obtain/retain/increase trauma cover because they are "at that age when people start to claim most" is based on claims data shared by an insurer, packaged as an infographic for ease of consumption.

But why this data rather than, say, the loss ratio across that particular trauma book, or better, the probability that a 47yo male will suffer a serious illness that meets claim criteria within the next 12 months? I'm betting there's a very accurate figure on the first and a fairly accurate number on the second.

On 17 September 2025 at 11:46 am Paul Flood said:

Thanks for the offer Steve, I’ll reach out via LinkedIn shortly.

The fact insurers don’t like and can’t price for indeterminable risk is exactly why I think it is understandable there isn't (and can't be) a true indemnity trauma product.

If we accept that actuaries can’t quantify the risk well enough to price a more proportionate trauma offering, why is it reasonable to think that advisers will have a better time identifying and quantifying a specific client’s risk of future loss through serious illness, and then cobbling together a solution out of the available offerings?

I’ll expand on this in a reply to your second article in this series, but my general thought is: While it might be possible to identify under- and over-insurance with trauma cover (on its own or as a “gap filler”), this still leaves a wider range of “suitable” solutions in terms of sums assured and product types than I think you allow for.

I look forward to future discussions where hopefully I can better understand an alternative view on this matter.

On 30 September 2025 at 1:37 pm JPHale said:

@Paul this is exactly the discussion I intended with writing the original article, we need to consider alternative views and approaches.

In the vein of plan for the worst, hope for the best; you don’t want value for money out of a life insurance product. It has value by being there to protect you.

In terms of the advice, correct, that's putting the client first and understanding their needs. However, that needs to be tempered with most clients don't have the financial literacy or knowledge to direct this until you have spent time educating them.

The gap with most sales processes disguised as advice is they don't tackle the education piece and play the time pressured sales approach to move things along.

Data helps drive advice and I agree, that one data point isn't justification to recommend cover or not.

However, stats where 30-35% of people before age 65 will either have a trauma event or more than 6 months off work is far more powerful. They poky more at using a disability product with critical illness cover, backed up by additional trauma and medical covers as appropriate.

The reality is you put 100 advisers in a room with a case study, you’ll get 105 different answers and a lively debate at the bar after.

Trauma Cover: Are we thinking things through or just doing what we have always done?

Trauma cover is an interesting one, as its use over the years has changed and evolved.

Wednesday, September 10th 2025, 9:42AM 12 Comments

Comments from our readers

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