Trauma insurance provides for payment of a lump sum if the life insured satisfies the definition of an insured event under the policy so they can:
n gain access to the best possible medical care and rehabilitation services; and
n make desired lifestyle changes.
The challenge for a financial adviser is to quantify the lump sum required to achieve this for each client so that an appropriate recommendation can be made.
Many calculation formulae exist, but none is backed by sound logic and, therefore, each leaves the adviser exposed to the risk of providing inappropriate advice.
A solution lies in separating the medical and rehabilitation costs associated with the suffering from an insured trauma event from the change in lifestyle costs, and then initially focusing on the medical and rehabilitation costs.
These costs make up what is called ‘the lifetime financial cost’ (for example, the medical and rehabilitation costs incurred by a cancer sufferer are termed ‘the lifetime financial cost’ of cancer).
The three most common trauma insured events are heart attack, stroke and cancer; comprising around 90 per cent of claims paid. Therefore, if we could reasonably estimate the lifetime cost of these trauma events, the adviser would have a logical basis on which to recommend an amount of insurance to cover the insured’s medical and rehabilitation costs.
However, a problem has been the lack of robust estimates of the lifetime costs of these medical events.
A recently released (April 2007), 180-page report by Access Economics entitled Cost of Cancer in NSW has provided part of the solution.
Access Economics — Cost of Cancer in NSW
The report opens: “A cancer diagnosis is a devastating and often life-changing experience. People diagnosed with cancer face physical and psychological challenges during their cancer journey. They may also incur financial and economic costs, which are often overlooked when considering the impact of cancer.
“The Cancer Council NSW is especially interested in the costs borne personally by people with cancer and their loved ones; cancer treatment accounts for a third of the total financial cost of the disease.
“The bulk of the financial costs relate to lost productivity, most of which is borne by individuals and their households.
“Many people undergoing cancer treatment require extended time off work whilst facing increased medical bills and other expenses.
“Cancer can also affect long-term employment prospects and may have an impact on unpaid work, such as the ability to care for family members.
“These are the hidden costs of cancer faced by many cancer patients.”
Immediately, the report highlights the need for a comprehensive risk insurance solution so the financial costs associated with a cancer diagnosis and treatment can be mitigated.
The report goes on: “As well as a reduction in income, households affected by cancer also often face out-of-pocket costs related to transport, medications, specialist clothing and mobility devices, childcare and housekeeping costs, amongst other things.
“The Cancer Council NSW believes that cancer patients have enough to deal with in managing treatment [and the] psychological and physical issues associated with a diagnosis. It is unfair that cancer patients should be further burdened by financial stress.
“… Much more needs to be done by government, employers and industry, as well as non-government organisations to develop and implement policies to reduce the economic impact of cancer on affected individuals, their families and society.”
Indeed, much more needs to be done by insurers and financial advisers to develop and implement insurance policies to reduce the economic impact of cancer and other trauma insured events.
So what were some of the specific findings of the report?
Incidence, mortality and prevalence of cancer in NSW
“In NSW in 2005 there were around 33,700 new cases of cancer — 18,400 males and 15,200 females. Cancer caused around 13,400 deaths.
“The most common cancers were melanoma (10 per cent of all cancers), colorectal (13 per cent), prostate (13 per cent), breast cancer (13 per cent) and lung cancer (9 per cent).
“There were around 210 new cases of cancer, and 30 deaths (in NSW), in children aged 0 to 14 years; causes and deaths were most commonly leukaemia, brain cancer and non-Hodgkin’s lymphoma.”
Some insurers offer children’s trauma insurance.
Types of cancer costs
The report identified several different ‘costs’ associated with cancer.
The main costs were the non-financial ‘burden of disease’ costs, including the “pain, suffering and premature death that result from cancer.
Although the most difficult to measure, these can be analysed in terms of the years of healthy life lost, both quantitatively and qualitatively.
Another non-financial cost was Government ‘losses’ associated with taxation revenue foregone, welfare and disability payments.
The remaining costs have a direct financial impact on the cancer sufferer.
(i) Productivity costs (for example, productivity losses, temporary absenteeism, long-term employment impacts and unpaid work, and the value of informal care such as carer costs).
Risk insurance solutions include income protection insurance and, for the self-employed, business expenses insurance.
(ii) Medical costs (for example, hospital treatment, residential aged care, general practitioner and specialist medical services, pharmaceuticals, allied health services, research and costs such as health administration).
(iii) Rehabilitation related costs (for example, respite, palliative care, special education, other formal community care, aids, home modifications, transport, accommodation, communication, complementary and alternative therapy, counselling and support programs, educational material and funeral costs).
Trauma insurance provides an ideal risk insurance solution for medical and rehabilitation costs.
Cost of cancer
“The total expected lifetime economic cost of cancer per person is around $966,000:
n non-financial costs: $851,500; and
n financial costs: $114,500.”
The report found that, on average, just over one-third of the financial costs were medical and rehabilitation costs, say $40,000.
Therefore, based on this, a reasonable allowance within a trauma insurance recommendation for the financial costs associated with cancer would be $40,000.
If an adviser wanted to allow more for medical and rehabilitation costs, they would recognise that costs vary and some common cancers have a higher financial cost than the average of $114,500 (for example, lung cancer, non-Hodgkin lymphoma and leukaemia).
Avenues of financial support
The report cited various types of financial support for cancer sufferers, including:
n sickness allowance;
n disability support;
n carers payment;
n rent assistance;
n workers’ compensation; and
The report also made a four-line reference to, “Private health insurance, life insurance and income protection benefits — through various schemes, some people may be covered by insurance for the cost of health services, formal care, funeral expenses, and compensation for lost income due to cancer.”
Nowhere was there a reference to trauma insurance.
Rather than be critical of this oversight, however, we could accept responsibility for not promoting well enough the value of this product.
While the report provides a valuable insight into the lifetime costs of cancer, there is still a need for similar information to be sourced for the costs of stroke and heart attack.
Also, advisers need a sound basis for estimating the ‘change of lifestyle’ costs.
Therefore, while the Access Economics report should be applauded, more work needs to be done before the basis of the trauma insurance recommendation is sufficiently robust.
Col Fullagar is the head of life risk at Challenger Financial Services. This article is intended for general use only and should not be used as the basis of a risk insurance recommendation. Advisers should conduct their own research and take into account the unique position of each client.