All insurance sums insured are supposed to be based on the concept of indemnity. Too much and we create hazards, too little and we have shortfalls.

The principle of indemnity is reasonably clear in most of the methods of calculating life, total and permanent disablement cover, and income protection. Indeed, with income protection (including mortgage protection as part of a package), insurer’s experience is such that none offer full indemnity.

Medical is a reimbursement plan. What’s left is trauma and the challenge on how to set sum insured.

What does indemnity look like for trauma cover? The challenge is that as the benefit is paid on diagnosis, not impact on life, indemnity is not easy to calculate.

One heart condition may be bad that the client is effectively disabled for life, another may find that surgery and drugs have them back to normal within weeks – and many policies would pay the same for both events.

These are the main methods used to overcome this difficulty.

Give up – and just pick a number. Although this seems to admit complete failure, not addressing indemnity at all, it is, in effect, the approach suggested by some academics. I don’t like it personally.

Treat trauma as lump-sum income protection – and use it where income cover is not available, or the client cannot afford the level of cover required.

They are substitutes for one another in the same way bikes and cars are both forms of transportation. Similar, but different.

Short-term income-based: one example I wrote about not long ago was to set trauma sums at about two years income – based on cancer (which accounts for between 45% and 65% of trauma claims, depending on sex of the client) as this covers a typical cycle of diagnosis, treatment, and outcome.

Long-term income-based: another example from Steve Wright at Partners Life was the concept of setting the sum at the level required to cover the gap between the maximum income protection that can be bought and the income the client would have earned. This shares some of the features of the decision by some advisers to use trauma cover where the client will not buy income protection… and it shares some of the same problems.

Finally, with income protection typically costing between 2% and 4% of income, adding many other benefits, especially expensive ones like trauma, creates cost problems. There are some choices available that can help: a wide range of serious/major/severity-based trauma options from AIA-Sovereign, Asteron Life, Fidelity Life and Partners Life.

These options all exist to provide more dollar coverage for the big events for less premium.

But whatever sum insured that you choose, the budget window will likely give your number a haircut.