Life, Trauma, TPD or Income Protection: What's the Difference?

These four covers solve different problems. Life insurance pays a lump sum when you die or are terminally ill. Trauma, or critical illness, pays a lump sum if you are diagnosed with a serious condition such as cancer, a heart attack or a stroke. TPD pays a lump sum if you become totally and permanently disabled. Income protection pays a regular monthly amount while illness or injury stops you working. Many people hold a mix.

When does each type of cover pay out?

Life insurance pays out on death or terminal illness. Trauma cover pays on the diagnosis of a defined serious condition, whether or not you can still work. TPD pays if you are assessed as totally and permanently unable to work. Income protection pays while you are unable to work due to illness or injury, for as long as the policy allows.

Lump sum or monthly: which suits what?

A lump sum, as with life, trauma and TPD, can clear debts, fund treatment or cover one-off costs at a difficult time. A monthly payment, as with income protection, is designed to keep replacing income while you cannot work. They serve different needs, which is why some people combine them.

Can these covers be combined?

Yes. It is common for people to hold more than one type, because each addresses a different risk. How they are structured, and whether some benefits share a single sum insured, varies between policies and affects both the cover and the cost.

What might people prioritise on a limited budget?

There is no single answer, because it depends on your debts, your dependants, your income and what you already have. Some people start with the cover that addresses their biggest financial risk first, then add to it over time. An adviser can help you think through that order for your situation.

How do I know what is right for me?

Because each cover does a different job, the right combination is personal. Many New Zealanders find it helpful to map out what would actually happen to their household under each scenario, then match cover to the gaps, rather than choosing products in isolation.

You can read more about each type of cover on our personal insurance page.

The information in this article is general information only and is not intended as financial, medical, health, tax or other advice. It does not take into account any individual’s personal situation or needs. You should consider obtaining professional advice from a financial adviser in relation to your own circumstances and before acting on this information.