Critical Illness Cover
When most people consider life insurance for the first time they are in the prime of their life and probably have little or no experience of critical illnesses. However, their lack of anecdotal examples contrasts sharply with statistics on how prevalent critical illnesses are in the UK. Cancer Research claim that every two minutes there is a diagnosis of cancer in the UK alone, which equates to one in three people being diagnosed at some point in their lifetime. In 2009, more than 48,400 women were diagnosed with breast cancer making up 20% of critical illness insurance claims. www.telegraph.co.uk/finance/personalfinance/insurance/criticalillness/6251215/How-important-is-critical-illness-cover.html
And for men there’s a strong risk of testicular cancer at a much younger age than cancer typically strikes. And it’s not just cancer, strokes kill 53,000 a year according to the British Heart Foundation and many more are unable to work after suffering one.
Many people are confused by the terms Critical Illness Cover and Serious Illness Insurance and it’s not wholly surprising as there are various different insurance products with similar names covering very different scenarios. Even if you can work out exactly which product you need, finding the insurer who best covers your requirements can be a real headache as policy wordings and definitions about important factors such as pre-existing conditions, reductions in cover and payouts can vary quite considerably between each insurance provider.
So let’s start by defining the various types of products on offer and explaining the differences between them
Term life insurance or term assurance is life insurance which provides cover for a fixed monthly payment for a limited period of time i.e. the term. When the term expires, the level of cover at the previous monthly premiums is no longer guaranteed and the client must either cancel the policy or obtain further future cover that will be underwritten again relative to your revised circumstances (mainly the fact that you are older) generally resulting in higher monthly premiums and/or different conditions. There is no cash value or surrender value to the policy during or at the end of the term. If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is generally accepted as the least expensive way to purchase a substantial benefit on death over a specific period of time. Term life insurance should not be confused with whole of life insurance which protects an individual until they die. These policies are considerably more expensive than term life insurance in your younger years and can be much more complex with an investment element of the premium and a surrender or cash value to the policy.
Critical illness insurance or serious illness insurance
This is an insurance policy that usually pays out a tax-free lump sum if you suffer from one of the listed critical illnesses that satisfies the definition set out in the policy terms and conditions. It generally has term life insurance cover incorporated into the product so that should you die, regardless of it being from a critical illness, it would also pay out the sum insured. Not all policies cover the same critical illnesses but policies should cover cancer (sometimes excluding less advanced cases), heart attack (sometimes of specified severity) and stroke (sometimes only resulting in permanent symptoms). Insurers that are members of the Association of British Insurers (ABI) follow a statement of best practice which attempts to give some consistency to the terms of these types of policy http://www.abi.org.uk/information/consumers/health_and_protection/critical_illness_insurance.aspx
Some people get confused when they have suffered a pre-existing critical illness and assume that critical illness insurance is something designed for their circumstances. This is not the case but life insurance and critical illness insurance can be taken out by people who have had pre-existing serious illnesses but normally these conditions will be excluded from the cover or if included, result in reduced payouts and/or significantly higher premiums.
Income Protection Insurance
This type of policy, formerly known as Permanent Health Insurance is designed to pay a tax-free monthly income while the insuredperson is unable to work due to illness or injury and suffers a loss of income. There is no lump sum payment and policies often have a ceiling on the benefit payable and restrict the monthly amount to a proportion of the insured’s full salary.
Is Critical Illness insurance worthwhile?
If you are young it might seem like the risks of having some sort of life changing condition are relatively small. Many decide that this perceived lower risk outweighs the benefits of the extra monthly cost and that this money is better spent on more essential day to day costs of living. Many also choose to put their money into savings products in the belief that if they become ill, the savings or investments will be enough to see them through a period with no income. While this is a viable option for some, the truth is that for most people savings will never compare to a critical illness cover payout. Furthermore, if savings are instantly accessible, there is always likely to be a financial pressure or demand in day to day life which may tempt you to use those savings. This philosophy also depends on you actually being disciplined in your saving regime. According to a 2011 Credit Action survey 40% of us aren’t currently saving anything.
Even if you are currently in a position where you have savings, these might not be enough to cover your living expenses for an extended period of a critical illness. If you have a non-working partner and dependent children how long would they be able to keep up payments on a mortgage, bills and other essentials even with a savings pot. Critical illness cover in most cases would be a better option as the payout, if set at the right level, would at least help pay off the mortgage and provide an income substitute during a time where the focus of your loved ones needs to be on supporting you through your illness rather than worrying where they will live and how they can manage to pay household bills.
Once you commit to paying monthly for your critical illness policy, it is important that you remember its importance and why you took it out. Many people, when money gets a little bit tight, start seeing payments for insurances going out from their bank account each month and begin to question if the policies are worthwhile any longer. Those people lapsing on protection products has increased fourfold from 2% to 8% during the recent recession as other outgoings get priority at a time of squeezed incomes. Insurance is, by its very nature, a difficult concept to always see the value of as you will always be in a bad place when you need to claim on it e.g. a car accident, a house fire, a critical illness or ultimately death and whilst many of us think we are invincible and have a ‘that will not happen to me’ attitude, think how much worse that would be for you and your loved ones if you had to endure some of life’s inevitable misfortunes with no money to see you through.
Surprisingly, the number of critical illness policies currently on risk in the UK is only 690,000, being just over 22% of the total number of life insurance policies held. People don’t seem to value critical illness as highly as life insurance and some of this low take up may be down to the higher cost of critical illness insurance over standard term life insurance cover and also the bad press that insurers have had relating to inconsistencies in the illnesses and circumstances for which they will pay out. However, the industry has now brought in new guidelines that we have already mentioned in this article which has gone a long way to standardizing terms and illness definitions. Despite life insurance policies being far more common and often cheaper, critical illness insurance is five times more likely to make a pre-retirement payout and considerably more beneficial to you and your loved ones should you become seriously ill but avoid death.
What is covered by critical illness policies?
Every insurance company has its own list of conditions that are covered by its insurance policies and insurers can and do change their offerings over time and so it’s always important to read the policy document rather than rely on brief policy feature summaries on comparison websites. Typically, the best policies will always cover seven core conditions: cancer, heart attack, kidney failure, coronary artery bypass, stroke, transplants of major organs and multiple sclerosis. In addition most will make a pay out for other illnesses or injuries that lead to permanent disability although the definition of what constitutes this condition can change between insurers. Not all critical illness policies cover this typical minimum that most people look for, so be wary of very cheap premiums and shop around.
The best practice document produced by the ABI in 2011 to which we have already referred has moved the whole industry towards standardization of key terms and benefits which includes not only a set of core illnesses covered by all policies but also pay outs should children of the policyholder become critically ill. These payouts are not usually for the whole amount of cover for the policyholder but nonetheless are a positive addition to the policy benefits. A negative element of these recent changes however, brought in more exclusions to policies. For instance some cases of cancer that are not life threatening are now no longer covered, such as minor prostate cancer, tumours that aren’t in either tissue or organs and skin cancers that are non invasive. It’s not just some cancers that saw exclusions in these new guidelines, the definition of a heart attack has been narrowed to only include attacks that come with the standard chest pain associated with a heart attack and may require proof from an electrocardiogram if the claimant is to be successful in receiving a payout.
As well as differences in what conditions are covered by critical illness cover there are differences in term length between the insurers. People often choose the term that is most appropriate for their circumstances, with many taking the cover out at the same time as their mortgage for a period that lasts the same amount of time as the mortgage will take to pay off. Other policies are indefinite but with varying premiums that will typically rise to unsustainable levels in old age. It’s important to make a choice based on your best judgment of your long term requirements which is not always easy. If your fear is simply that you will no longer be able to afford to keep up payments on your mortgage should you become ill then a policy for the same term as your mortgage is going to be the most appropriate. If you are more concerned that government disability payments or benefits won’t be enough to sustain the lifestyle you are used to should you fall seriously ill then an increased sum assured would probably be a preferable option. While you are always free to take up another policy at any time (most insurers will take anyone aged from 17 to 70) what is covered by insurance is being cut and changed periodically as medical advances mean that certain conditions are no longer life threatening. Furthermore, the cost of insurance is rising continuously due to a rising number of claims, so it could be best to decide on a good policy now that you’ll keep as long as you think you will need it rather than relying on the possibility of getting another one after your initial term expires.
The majority of insurers work on a principle of making a full payout if the condition meets the policy criteria. This might at first glance seem the best option, but it leads insurers to having watertight and often complex and confusing definitions of what is covered. These tight definitions might adversely affect you if you become ill. Some will insist on certain pieces of evidence for payouts or won’t pay out on conditions unless it reaches a state where a specific operation is deemed necessary and carried out. A few critical illness providers are different, for instance Prudential, Axa, Skandia and Royal Liver policies work on a sliding scale based on the seriousness of the condition and will pay out a percentage of the amount insured. This can be as low as ten percent for less serious conditions that typically are not wholly life threatening. For many this can be useful; as a condition that isn’t life threatening could still cause financial hardship if it means a job is lost, even if later the policyholder is able to restart their career. In this way these policies that pay out based on seriousness are more similar to other types of insurance policies, for instance contents insurance wouldn’t pay out the full value of your home’s contents if only your television was stolen.
It’s a good idea to use the template that the Association of British Insurers give their members in their statement of good practice as a basis for comparing what insurers do or don’t exclude in their policies. You can quickly see if a policy that you are reviewing excludes any example they detail as best practice in the template. This is available here: www.abi.org.uk/Information/Consumers/Health_and_Protection/54766.pdf
Typical exclusions from most policies include damage caused by drug abuse, failure to follow medical advice, HIV/AIDS, anything self-inflicted, those who move abroad, and illness as a result of war.
Many people will already have experienced some condition related to a critical illness when they take out their policy. With advances in medical technology many cancers have a very high survival rate. In the past this might have excluded you from taking out critical illness cover but today there are specialist policies that exclude certain types of illnesses. These will usually come with a significant drop in premiums payable, although the obvious downside is that you won’t be covered for the critical illness that is excluded. If you’ve previously had cancer and have been lucky enough to beat it, you can still take out critical illness cover that excludes cancer from insurers like LV, Zurich, Bupa and Fortis.
Some people might be tempted to bend the truth or just plain lie about their pre-existing conditions when taking out critical illness insurance because they are worried these will lead to exceptions or an increase in premiums. This is obviously illegal – it’s a form of fraud – but is still a calculated risk some people take. It will typically backfire though as insurance companies employ large staff whose sole role is to search through medical records to see if they can find any reason not to pay out. If you’ve lied on your proposal form or failed to mention something significant the insurer will, quite rightly, use this to avoid paying out. You really don’t want to fall victim to this so it is always best to be entirely honest about your own medical history and ensure you’ve told them everything that they want to know on the application form. You’d be surprised at how effective insurance companies are at discovering reasons not to pay when you try to make a claim so it’s best that they know everything in advance so they’ve got no reason or ability to refuse a claim at a later stage. If in doubt as to whether an existing or past condition is relevant to your application it is always best to disclose it.
Critical Illness Cover vs. Income Protection Policies
Critical illness insurance isn’t the right policy for everyone. Especially now that many conditions are being excluded it can be better to go for an income protection policy instead which will cover other causes of no longer being able to work such as an injury. These policies have their own exclusions, but are typically more comprehensive than critical illness insurance policies. Indeed some insurance advice services such as MoneySavingExpert recommend going for these purely because critical illness cover policies can be difficult to understand. We believe this is not a valid reason to ignore critical illness insurance as you can easily get a financial adviser to explain the terms. Further, both types of insurance clearly offer an effective solution subject to your individual needs. It could be that if you could afford to you, then you may consider taking out both types of policy. Perhaps a smaller amount of critical illness lump sum that may cover the majority of your mortgage coupled with an income protection policy to give you an income in most situations that could arise that stop you from working would be a good option. There are cases where a critical illness insurance policy will pay out when an income protection policy would not. Most notably this can occur in cases of minor strokes, which can result in ‘permanent symptoms’ but may still allow you to work. Some insurers will offer alternative options including mortgage payment protection insurance, which may also be worth considering. However, this type of policy has had incredibly bad press over the last few years due to systemic misselling across the whole industry.
There are other differences between critical illness and income protection, which are worth mentioning. Critical illness cover runs for a term set from the point the cover is taken out and can continue to cover you into retirement, while income protection insurance typically will only cover you until normal retirement age as the purpose of the policy is to stand in for earnings if the policyholder is no longer capable of working. Therefore for those approaching retirement, critical illness cover will often be more appropriate. Furthermore, as critical illness cover typically makes a lump sum payout rather than providing an alternative income, it can be used for other purposes, for instance, enjoying the short time a critical illness may leave you with or perhaps paying for experimental treatment only available privately that may give you a better chance of recovery. Income protection insurance would not offer a large enough sum for this, but would possibly be better if you are just worried about more day to day injuries or illnesses that may keep you off work for a shorter finite period.
Our general view, unlike many other financial products, is to avoid switching policies. There are exceptions to the rule, but illnesses covered by insurers’ policies are being restricted continuously and it is unlikely any policy taken out more than a few years ago can be matched in terms of price or coverage by what is on offer today. Medical advances make more cancers and other conditions treatable and hence these are taken off the list of conditions insured on newer policies while existing policies will still cover them. Similarly both your increase in age and the increase in costs the insurer faces is likely to mean that policies available to you as your age increases will be more expensive.
The other possible issue that you might face from changing policies mid-term is you may fall foul of having to declare pre-existing conditions that have come about since you took out the original policy. As previously highlighted, this may well lead to higher premiums or exclusions.
If you’ve taken out a policy in the last fourteen days you’ll still probably be in a cooling off period where you are able to cancel the policy, so if you’ve rushed into one recommended by your mortgage provider it might not be too late to cancel and switch.
One further possible consideration is that if you are a man who has taken a policy out recently, from the 21st December 2012 insurers will no longer be able to charge men and women different premiums as the European Court of Justice has ruled this to be discrimination (source: http://www.abi.org.uk/Information/Achats/life.aspx). So for men it might be worth waiting until after this date as premiums may well go down. However it is more likely that premiums for females will rise, so it may be advisable for women who are considering critical illness to look at taking it out prior to this date.
Using a Financial Adviser or going it alone
We have detailed in this article that critical illness can be a maze of complex terms and conditions, exclusions and varying cost between policies and providers. If you are one of the minority that are familiar with the details of insurance policies and confident in assessing various products and prices then you will, no doubt, look to arrange a policy yourself directly with an insurer. However, you should not underestimate the research and time that will be required to get yourself a best-priced product that suits your needs. For most of us, an independent Financial Adviser or a qualified broker offering advice and recommendation would probably be the best solution. Specialist matters require specialist individuals. After all, you would not attempt to re-wire your own house knowing nothing about electrics. You would get it done by an electrician who had qualified through a recognized organization that made sure he was fit and proper to carry out the work. In the Financial Services industry, only qualified individuals can advise you and they are strictly governed by the Financial Services Authority through a set of comprehensive regulations that are focused on treating customers fairly. A good adviser will also be able to speed up the process, as they should have access to products for the whole of the market, which they can easily compare in terms of features and price. Having carried out a ‘financial factfind’ with you they should be able to assess your needs and recommend you a range of products. Finally, they should be able to explain policy features, exclusions etc. with you in a language you understand and will help you with the completion of the often, long application forms required for this type of policy.
Conclusion: making your choice
So now you’ve read our guide and are looking to take out a policy, you have several choices to make:
- Is critical illness insurance really the most appropriate cover for your circumstances or is an alternative such as income protection, savings or life insurance a better option?
- Should you choose a fixed pay out or one with a sliding scale based on the severity of the illness?
- What amount should you take a policy out for?
- How long would be appropriate for the policy to last for?
- Which insurer and which policy is best for your circumstances?
- Should you arrange this yourself or use an adviser?
The answers to most of these questions are personal to you and your circumstances and are best explored by comparing policies on offer with much thought and consideration albeit this is a mammoth task with over 200 policies currently in the market. Financial advisors qualified in this area will be able to assist you in this process and will cut out a lot of the work and should give you the confidence that they have recommended the best priced product for your needs. They will charge a fee but it may well be worth the cost for the service they provide compared to the time and effort you would need to put in on your own and the nagging worry that you may have missed a key issue.