Personal Finance: Tragic tale sparked trauma insurance

South African surgeon Marius Barnard went down in history as part of the team, led by his brother Christiaan, which performed the first human heart transplant operation in 1967.

But he was also the creator of a kind of insurance that covers hundreds of thousands of New Zealand families from financial hardship in the case of severe illness striking.

Barnard is credited with inventing critical illness cover, also known as trauma insurance, which he designed to relieve the financial hardship that can come with a big health shock.

While life insurance pays a lump sum on your death, trauma insurance pays a lump sum on the diagnosis of any one of a number of serious illnesses.

To understand how that can work, you only have to go back to a tragic tale related by Barnard of a young woman with several children who contracted lung cancer.

Barnard removed one of her lungs. Several years later the woman returned to Barnard's office, not many weeks from death.

She was in a terrible state, and the surgeon was horrified to find she was still working because she needed to pay the rent on the roof over her children's heads.

Barnard said: "When she was buried the life insurance policy paid out. Wouldn't it have been better if she had had the money when she was diagnosed with cancer?

"That poor little girl had to work until she basically was dead."

Barnard took his thoughts to an insurance company, and a new form of insurance was born.

The idea was that trauma insurance would pay a lump sum on the diagnosis of one of a limited number of serious illnesses, the most important being cancer, heart attack, and stroke.

At the end of December, New Zealanders had signed up to policies that collectively had annual premiums of $323 million.

Claims for the last three months of the year were $37.6m, indicating an annualised figure of over $150m of claims.

Trauma premiums paid to insurers have overtaken income protection as the second largest premium-earner for life insurers, but they are still a long way behind the more than $1 billion in collective life insurance premiums.

Figures from Fidelity Life show that Barnard was bang on the money when it came to the big areas of claims that trauma policies were there to protect.

Causes of critical illness claims in 2014 for Fidelity Life policies showed half were for cancer. Another 13 per cent were for heart attacks, and 4 per cent were for strokes.

For women 65 per cent of claims were for cancer with breast cancer figuring heavily among claims.

For men, cancer made up 37 per cent of claims, with melanoma and prostate cancer figuring prominently.

Fidelity's claims manager Kevin Nolan said a cancer diagnosis can be devastating. It can mean time off work, fear of death, treatments that are hard on the sufferer and new expenses at a time of emotional and physical hardship.

But it is not just a desire to be able to pay down debt, or to produce a lump sum to live off for a period of time that motivates people to buy trauma cover.

"On the treatment of cancer, the public system does its best, but a lot of the newer drugs now are not fully funded," Nolan said.

Lump sum payouts under trauma policies can plug that funding gap, especially as sums insured tend to average around $150,000 to $200,000.

Payouts can also be used to fund home alterations if a trauma like a serious head injury or stroke requires it.

The sums insured are often not enough to pay off the mortgage.

That's because of the cost of trauma insurance is much more expensive than life cover.

But then a relatively larger proportion of people with trauma cover make claims.

As well as cancer, heart attacks and strokes, policies cover things like being diagnosed with multiple sclerosis, or a brain tumour, or chronic lung disease, or suffering a major head trauma, the loss of sight, or severe burns.

Exactly which illnesses are covered is shown in each policy, but despite the name "trauma" insurance, not all traumas are covered.

A car accident sounds like a trauma, but even if one keeps you off work for several months, and leaves you permanently physically damaged, it does not necessarily trigger a trauma payout.

It might, said Nolan, if one of the conditions listed on the policy is a result of the accident like a head trauma, or severe burns.

The cost of trauma cover has led to evolution in policies.

Fidelity Life's national sales manager Peter Mensah says earlier detection of problems, and improving medical science has led to some diagnoses no longer being as serious as they once were.

Mensah said in order to keep policies affordable, insurers have lifted the severity of some definitions.

Being diagnosed with a minor heart attack might feel like a big deal, but it may not trigger a trauma payout depending on the wording of a trauma policy.

Trauma insurance has traditionally been a bit of a one-hit wonder.

A policyholder claims, the insurer pays, the cover is terminated.

For a relatively minor event, that might have felt a little like winning Lotto.

And, if the former policyholder wants cover again, they will probably have an "exclusion" put on their new policy for the thing they claimed for.

Because the insurance definition of a condition like a heart attack can vary from common ideas about what one is, trauma policies have a level of complexity that has not lent itself to the sale of policies direct to the public.

They are a type of policy that need more explaining and thinking about than the comparatively simple life cover that many people buy direct.

By contrast, trauma cover is generally sold by expert insurance advisers able to explain how it works to clients.

Policies can cover a bewildering list of illnesses, which requires a medical dictionary to understand.

Fidelity Life's PlatinumPlus Trauma Cover lists 43 in all.

The joke in the industry was that some illnesses were added just to make the list look long and impressive to wow customers and their advisers, even though the chances of a claim being made on one were so small as to make its inclusion a bit laughable.

The example often given was mad cow disease, or as it should be more properly described Creutzfeldt-Jakob disease, or CJD.

Nolan acknowledges the accusation, but says Fidelity Life has just had its first claim for CJD.

That may be a New Zealand first.

The expensive nature of trauma cover has led to new evolutions.

Cut-down forms of cover like Pinnacle Life's cancer-only trauma cover have appeared, and Fidelity Life has just launched a new trauma policy which offers cover for up to five different and unrelated trauma events, each paying up to 20 per cent of the total sum insured.

It is designed to provide cover that does not end at the first claim.