By Daniel Archibald | CFA
Insurance policies to help surviving family members in the event of the loss of an income producer, and to cover associated costs (funeral expenses, etc), have been around in some form for over two thousand years. As everyone is subject to the mortal condition of death (at least for now), the correct technical term for such policies is life assurance. However, an even more correct terminology might be premature death insurance, though most people know it as simply 'life insurance'.
One branch of life insurance, which has been sold as an added rider to death cover or separately since the late 19th century, is disability insurance. Like death cover, this has usually been sold in order to cover loss of an income producer, and can be either temporary (now commonly referred to as income protection) or permanent (commonly referred to as total and permanent disability [TPD] cover). Unlike death, disability is not a universal condition, with only a fraction of the population suffering from disablement. However, it does have a similar effect to death in that the person is no longer able to work for an income.
In the 1970's, a pioneering heart surgeon in South Africa by the name of Marius Barnard, was concerned about the financial burden left on many of the families of the patients he helped to save. Many of them had life insurances, but the medical advances of the 20th century had started to mean that patients who would normally have died (and thus create an insurance payout to grieving members) were now surviving. Dr Barnard noted that even though he could repair his patients physically, only insurances could repair them financially.
In 1983, Dr Barnard helped to sell the first critical illness insurance policy. The purpose of the policy was to help cover the expenses and loss of income associated with suffering from heart conditions and other life changing illnesses (particularly cancer). And by the 1990's, critical illness cover, also known as trauma cover or recovery insurance, has been an important component of the life insurance spectrum.
Mortality rates in Australia have continued to drop slowly over the past few decades, whereas disability rates (as measured by disability pension recipiency) has increased (though some of this increase would be as a result of increased labour participation). However, the incidence of serious illnesses such as heart disease, cancer and diabetes has risen dramatically over this same time. Furthermore, despite the Australia's universal healthcare system, the cost of treatment of serious illness and subsequent recovery has also increased over time.
Despite the growing understanding of lifestyle and dietary causes of these modern-day conditions, the likelihood of suffering from a critical illness continues to grow. And even though the cost of trauma insurance is also on the rise, a suitably-sized policy could be of great comfort for a family at a time of crisis.