Can Key Person Insurance cover trauma or critical illness diagnoses?

Yes; Trauma (Critical Illness) cover can be included in a Key Person package alongside Life and TPD, with the business as policy owner and beneficiary. All 9 panel insurers issue Trauma cover suitable for Key Person structuring; the inside-super pathway is closed for new cover post-1 July 2014.

The panel is AIA, Zurich, TAL, OnePath, ClearView, NEOS, Encompass, Acenda, and Futura. Trauma pays a lump sum on diagnosis of specific medical conditions defined in the policy, regardless of whether the key person ultimately returns to work.

Why Trauma is a useful Key Person trigger

Unlike TPD (which requires permanence), Trauma pays on diagnosis. This makes it useful for short-to-medium term business disruption:

• The key person is diagnosed with cancer and undergoes treatment; the business receives the lump sum to fund interim management even though full recovery is expected
• A heart attack or stroke triggers payment immediately; the business does not wait for the permanence assessment that TPD requires
• Working-capital shortfalls during the key person's recovery can be bridged from the proceeds
• Replacement specialist input (consultants, locums, project managers) can be funded during the recovery period
• Debt repayments can continue without strain on operational cash flow

For a business where a 6-to-12-month absence of the key person would materially impair revenue, Trauma cover provides faster financial relief than TPD.

Standard Trauma mechanics

• Lump sum benefit on diagnosis of a covered condition
• Survival period: typically 14 days after diagnosis before the benefit is payable (most panel insurers)
• Qualifying period: 90 days for cancer and certain conditions; immediate cover for accident-based events
• Definitions: each condition must meet the specific medical criteria in the PDS to qualify
• Reinstatement: some products allow Life Cover to be reinstated after a Trauma payout (the linked-Life-and-Trauma 'buy-back' mechanism)

Where each panel insurer documents Trauma cover for business use

| Insurer | Trauma product | Key features for Key Person | |---|---|---| | AIA | Crisis Recovery (and Crisis Recovery Stand Alone) | Available as Ordinary Plan only; Business Safeguard Forward Underwriting available on Crisis Recovery Stand Alone (capped at $2 million for Crisis Recovery) per PDS Section 8.12 | | Zurich | Zurich Wealth Protection Critical Illness (Trauma Plus partial-benefit option) | Partial-benefit option pays for early-stage or less severe conditions; comprehensive condition list per current PDS | | TAL | Critical Illness Insurance Plan (Standalone or attached to Life) | Available Standalone or as a Critical Illness Insurance Plan attached to a Life Insurance policy, per PDS Section 2.3 | | OnePath | OneCare Trauma Cover | Comprehensive and Premier tiers; condition list scales with the tier; Future Insurability business event supports Key Person increases | | ClearView | ClearChoice Trauma | Standard Trauma cover with Future Increase Benefit business-event triggers | | NEOS | NEOS Critical Illness Cover | Outside super only; Future Increase Benefit supports Key Person business-event increases (PDS) | | Encompass | Encompass Critical Illness Cover | Outside super only; Future Increase Benefit supports Key Person, buy/sell, and loan-guarantee triggers (PDS) | | Acenda | Acenda Critical Illness | Outside super recommended; Business Safeguard Option supports Critical Illness increases up to $2 million (PDS pages 56-58) | | Futura | Futura Critical Illness Cover | Outside super only; Future Increase Benefit supports Key Person business-event increases (PDS) |

Condition list sizes vary materially. Review the current PDS for each panel insurer before selecting, because the lists are updated periodically.

Inside-super Trauma is closed for new cover

Since 1 July 2014, the SIS Act sole-purpose test in s62 has effectively barred new Trauma cover from sitting inside super. Trauma pays on diagnosis with the member continuing to work, which does not align with the SIS conditions of release (death, terminal medical condition, permanent incapacity). For Key Person Trauma:

• All 9 panel insurers structure Trauma outside super for new cover
• Existing Trauma inside super (pre-1 July 2014) has been grandfathered with restrictions
• The policy owner (business, partnership, family trust, or individual) is outside the super system

Sources:

• APRA Letter on Insurance through Superannuation (1 July 2014)
• SIS Act 1993 (Cth) s62 (sole-purpose test)
• SIS Regulation 6.01(2) (conditions of release)

Tax treatment of Key Person Trauma proceeds

The ATO framework in TR 2009/2 governs how Trauma proceeds are taxed:

• Capital purpose (proceeds used for recruitment, replacement, debt repayment, or capital restructure): premiums NOT deductible under ITAA 1997 s8-1; proceeds generally NOT assessable as ordinary income; CGT exemption in s118-37(1)(a) typically applies where the recipient is the original beneficial owner.
• Revenue purpose (proceeds replacing business revenue that would otherwise be assessable): premiums deductible under s8-1; proceeds assessable as ordinary income.

The legal form of the policy (Trauma) is not the determining factor. The intended use of the proceeds is what matters under TR 2009/2. Document the purpose at inception with an accountant's letter.

Trauma in combination with Life and TPD

A typical Key Person package layers all three covers:

• Life Cover for death triggers (typically the largest sum insured)
• TPD Cover for total permanent disability triggers (own-occupation outside super; any-occupation inside super)
• Trauma Cover for diagnosis-based triggers (heart attack, cancer, stroke, organ failure, and a panel of additional conditions)

The three covers can be Standalone or Linked. Linked structures reduce the total premium but the payment of one benefit may reduce or cancel the others. Standalone preserves all three covers independently; the total premium is higher but the protection is broader.

Common considerations

• Compare condition lists across the panel before selecting an insurer. Panel insurers update their Trauma definitions periodically; the current PDS is authoritative.
• Survival periods (typically 14 days) and qualifying periods (90 days for cancer and certain conditions) vary; confirm in the current PDS.
• Trauma rates are higher than Life Cover; budget for the premium difference.
• Cancer Recovery, Heart Recovery, or condition-specific partial-benefit options on some products may add value for businesses where a single condition is the dominant risk (for example, a sole-founder business where the founder has a family history of cancer).
• General advice only. Engage your broker, accountant, and solicitor to coordinate the cover structure, documented purpose, and any buy/sell or loan-guarantor arrangements.

Regulator anchor

• Life Insurance Act 1995 (Cth) for the contract
• Insurance Contracts Act 1984 (Cth) s20B (duty), ss28-29 (remedies)
• SIS Act 1993 (Cth) s62 (sole-purpose test bars inside-super Trauma for new cover)
• ATO TR 2009/2 (capital vs revenue) and ITAA 1997 s8-1, s118-37(1)(a)
• Life Insurance Code of Practice 2019