Trauma insurance provides a lump sum payment for those who are diagnosed as suffering a major health trauma to help alleviate financial stress on the household. Unlike total and permanent disability (TPD) insurance, trauma insurance can provide cover where the person is expected to recover and return to their normal duties (i.e. work) after a period of time.

The payment could help you make necessary modifications to your home for a more comfortable living, cover medical costs, or allow you to purchase mobility aids (such as a wheelchair) for use while you recover.

Benefits are paid out only for health events listed by the policy. This typically includes heart attacks, strokes and cancer. Each trauma has defined medical conditions that have to be met in order to receive a claim.

Benefits are typically paid as a lump sum to the insured person to cover a range of needs; however, most people use the benefit to assist with large once-off medical expenses or to fund living expenses where time needs to be taken off work during recovery. It's important to check your policy to see what conditions you are covered for. You can no longer purchase new trauma insurance policies inside superannuation so these policies must be held outside superannuation.

Similar to the tax implications for total and permanent disability, trauma insurance premiums taken outside of superannuation are generally not tax deductible. However, trauma insurance benefit payments received from a successful claim are generally not assessable to tax.

Note: Trauma insurance policies created from 1 July 2014 must be held outside of superannuation.