10 important things to know about critical illness cover11/06/2015
Around half a million individual critical illness policies are sold each year, making it a cornerstone of financial planning for many families.
Product providers have radically developed their offerings in recent years, including severity based pay-outs and the strengthening of definitions across the most claimed against illnesses. Such changes have been of great benefit to consumers, and strong claims paid statistics published each year all help to maintain confidence in our industry.
Here, we take a look at the ten most important things advisers need to know about CI cover.
1. The basics
Most CI plans cover around 40-50 conditions. The most claimed against illnesses are cancer, heart attack and stroke. Products can also include conditions such as CJD, encephalitis and Crohn’s disease, for example, but these are much rarer in terms of claims.
According to CIExpert founder Alan Lakey, each year around 62 per cent of CI claims are for cancer, 12 per cent heart attack, 8 per cent stroke and 5 per cent multiple sclerosis.
CI cover is typically bought alongside life insurance and therefore can be structured as level, decreasing, index-linked, whole of life, family income benefit, joint or single cover, and so on. In fact, more than 95 per cent of all CI policies sold in the UK include life cover. It makes little difference to the premium but means if someone passes away within the waiting period for a CI claim, it is switched to a death claim rather than being declined.
Children are also often covered under their parent’s plan. Cover can vary between providers in terms of the age of the child, the percentage of the overall sum assured paid, and whether added extras are included, such as hospitalisation benefit.
2. Severity-based payments
CI products are structured to pay out in one lump sum or in staggered partial payments, depending on the severity of the illness. For example, many providers will pay out between 20-25 per cent of the total sum assured for early stage cancers.
Drewberry Insurance Director, Tom Conner says: “This... helps to build consumer trust. If someone is out of work for six months with an illness, they’d be extremely confused and angry if their claim was declined for not meeting a definition, in what they would see as small print.”
Traditionally, early-stage conditions were not covered under CI policies, because the condition is often localised, treatable and is not deemed to be life threatening.
Peter Chadborn, of Advisory firm Plan Money adds: “The increased prevalence of partial payments helps dispel the myth that Insurers try to avoid paying claims. It is also an agreeable concept for clients, who recognise that often it is fair to receive a lesser or earlier payment in certain circumstances.”
VitalityLife Deputy CEO Deepak Jobanputra, continues: “The reality is that covering against surviving a serious illness is more important than covering against just death – and people who survive one illness often go on to have other issues.
“In fact half of all heart attacks in the UK are repeat attacks, which is why cover for multiple conditions is so important. The definitions used is often the best way to determine the quality of the cover and those that pay out upon diagnosis, rather than those requiring treatment are preferable.”
3. Claims are paid
The number of CI claims paid has increased by approximately 10-15 per cent since 2005. Approximately 80 per cent of CI claims were paid then, compared to around 92 per cent today.
Industry developments to prevent innocent and fraudulent non-disclosure have played a huge part in ensuring more claims are paid each year. The transparency involved in issuing claims stats will also have brought greater scrutiny to why claims were being declined.
According to Alan Lakey at CIExpert, just 2 per cent of claims on average are declined today for non-disclosure. “The industry now recognises that declined claims are an issue picked up on by the press and social media. This has helped to focus their thinking,” he notes.
4. Check what it says ‘on the tin’
While severity-based payments have increased viable claims, it is vital that people are aware that not all forms of cancer or every type of stroke are covered, for instance.
Addy Frederick of insurer LV says: “It is essential clients understand whether the conditions covered are meaningful for their situation. For example, a female client may want a CI policy that has great breast cancer or ovarian terms.
“The illnesses covered vary significantly and there are a number of conditions which are not covered, for example if someone has a back injury or breaks their leg and can’t work.”
A spokesperson for Aviva and Friends Life adds: “It’s important that customers understand critical illness insurance only covers those illnesses defined under the policy terms and conditions. The product does not cover every illness that may be medically regarded as critical.
“It’s also important to understand there are specific definitions for those listed conditions and these need to be satisfied in order for a claim to be paid. For example, some early cancers are not covered.”
5. Don’t confuse CI with IP
CI policies cover a list of specified conditions, where income protection pays out if you are unable to work due to illness or injury, regardless of the condition suffered.
Emma Thomson at protection specialist LifeSearch explains: “It is essential to explain that CI isn’t designed to pay out if clients are off work sick. The ‘total permanent disability’ element of CI can often confuse the issue.
“It’s vital that advisers show clients the difference and advise accordingly, which in a large majority of instances will see income protection being the primary need, not CI cover.”
Tom Conner, of Drewberry Insurance adds: “In my opinion the biggest mistake when selling CI cover is not discussing income protection as well. Income protection covers far more eventualities, like being off work for six months with depression or back pain.
“Advisers need to be providing holistic protection advice and this isn’t possible if advisers just look to sell CI cover in isolation.”
6. Quality not quantity
Once upon a time it was thought the more conditions covered by a provider the better. But with the vast majority of claims coming from just three conditions - cancer, heart attacks and strokes - covering a huge number of additional conditions can become secondary if not irrelevant.
Fortunately, the trend has switched to a focus on the quality of the most claimed upon definitions. This can vary greatly between providers and therefore should often be the primary factor when choosing which cover to recommend.
Michael Aldridge, at London & Country says: “Friends Life is a very good example of this; they are now covering 20 fewer advanced cancers under one heading, rather than having 20 separate definitions and playing the numbers game. This adds greater clarity and simplifies definitions for illnesses that matter.”
Alan Lakey, at CIExpert adds: “A move towards quality is a common-sense approach, with similar conditions now being placed under the one claims heading. Many advisers count conditions, ABI+ numbers or focus on premiums. This is far too simplistic and inevitably increases the likelihood of an incorrect recommendation.”
7. Keep premiums within budget
While CI recommendations shouldn’t be driven purely by the lowest premium, cover has to come within the client’s budget. CI cover currently costs about 4.5 times more than the equivalent level of life cover, according to Gina Cowen, at quote portal iPipeline, so affordability is a much bigger issue when recommending CI.
“As a result we will often see advisers select a lower benefit amount. To address this need almost all providers will now allow you to set up a policy with a split sum assured, i.e. one sum assured covering CI and a different sum assured for the life cover amount.”
Emma Thomson at LifeSearch notes: “Running quotes for the whole mortgage amount, and then abandoning CI cover when the price is too high is a common mistake. The sum assured should instead be dropped try to meet the clients’ budget, so at least some cover is in place, for example, the equivalent of a year’s salary.”
Tom Connor, of Drewberry insurance, continues: “It is worth knowing that CI cover can be added to a family income benefit policy. This can work out a lot more affordable for clients on a tight budget looking for family protection.”
8. Ask upfront medical questions
It is important to manage client expectations when applying for CI cover, so that the eventual premium isn’t a shock if they aren’t accepted on standard rates. Health and lifestyle can have a big impact on the cost of CI premiums.
Gina Cowen, of iPipeline says: “Providers will underwrite the life and CI elements of cover separately, so a client might be rated or declined for CI cover but have a different outcome on the life element.
“It’s even more important therefore when recommending CI cover to ask some up-front questions about their state of health so you can have a better view on the likely outcome. There are tools available in the marketplace that enable advisers to better set client expectations.”
A recent iPipeline survey of over 1,000 advisers showed that 43 per cent had lost business as a result of unexpected ratings.
9. Underwriting decisions can be challenged
CI applications aren’t always straightforward and some clients will have more complicated medical circumstances than others. It is essential to not only manage the expectations of the client but also to provide the insurer with enough information to come to a fair underwriting decision. If one underwriter doesn’t come back with favourable terms don’t stop there.
Chris Morgan of advisory firm Unusual Risks says: “Don’t always presume the underwriting decision you have been given is correct. If your client is declined cover there are cases when this should be challenged.
“For instance, I was able to secure standard terms on life and CI cover for a client who was repeatedly declined or offered cover with exclusions. By presenting relevant medical information a case can be made to overturn the decision.”
10. Re-broking policies might not be wise
Definitions covered under a CI policy change over time in line with medical developments. This makes re-broking a complicated task which cannot be solely based on premiums.
Some clients will benefit from newer policies, with partial payments and more generous definitions for the most claimed on conditions. However this is not always the case.
Chris Morgan of advisory firm Unusual Risks says: “Where a client has CI cover taken out before 2005 advisers should be particularly cautious. It is around this time that providers removed coverage for angioplasty procedures, so this would not be included on newer policies for instance.”
Peter Chadborn, at Plan Money adds: “When re-broking a CI policy, to simply focus on premium comparison or the number of definitions is reckless.”
This writer has an older style policy with Aegon (Scottish Equitable), but when I needed new cover I didn’t switch it – I added new severity based cover with Vitality (PruProtect) which is one way of getting the best of both worlds.
Kevin Carr is managing director of Carr Consulting & Communications and chief executive of Protection Review
Originally appeared on http://www.FTadviser.com