Protection News OCT 201214/11/2012
Is it time to terminate Terminal Illness Benefit
The protection insurance industry does a lot of very good things. Over the decades it has come up with many excellent ideas (and a few not so great ones) that at the time – and for the foreseeable future – seemed like exactly the right thing to do.
One such development was Terminal Illness Benefit, which is included within the price on most modern life insurance policies.
The idea is that if the policyholder is terminally ill and isn’t expected to survive for much longer the plan pays out (in full) earlier than expected. Sometimes when families are faced with such a difficult situation the finances can become very hard to manage for a range of reasons, and so the industry did the right thing and said ‘we’ll pay early’ before any clogs are actually popped.
However, as with all insurance there needs to be terms & conditions, without which cover cannot be priced. The typically TIB definition requires life expectancy to be less than 12 months in order for a claim to be paid. But there’s a problem, perhaps several.
The speed of modern science is making it ever more difficult to predict life expectancy. It is also impossible to predict an individual’s ability to fight, or otherwise, life threatening illnesses. As such, it is very difficult for the medical profession to make predictions perhaps as accurately as they once did. And besides, is it always in the patient’s best interests to be given a specified timeframe?
Some sellers even go as far as to say that TIB is a bit like critical illness cover, which is misleading to say the least. One comes for free, the other costs about 6 times as much, which should suggest they are not the same.
Then there is the common final year exclusion, where TIB claims are refused in the final 12 or 18 months of a policy. Why does this rule apply? In one word: cost. A 5 year policy in effect becomes a 6 year policy (or a 25 year policy a 26 year one and so on) which means it should be more expensive. But the benefit is not valued at the time of buying cover – only in the event of a claim
A number of TIB complaints have featured in the media recently, including the Rip-Off Britain TV program, where a claim was made on a five year policy, which had two months left to run. The fact that a five year policy was quite possibly unsuitable was ignored, while the insurer was slammed for not paying out, even though most people would assume that life cover only pays out on death, not illness.
Should the industry be criticised? It tried to do the right thing, but times – they are a changing, and a new angle on TIB might not be the worst new idea.
One love, one life, one application form?
At a recent industry forum the idea of a common protection application form was suggested by some advisers. Speaking generally the suggestion isn’t a new one, and neither are the reasons why the idea is typically knocked back: ‘Insurers wouldn’t want it’ is usually the stock response.
However, the technology exists and most advisers would probably want it, so could it happen?
To clarify, a common application form for protection would mean that all insurers would have the same application form, a bit like they already do with annuities. Why might insurers not want this? Well, there is a link between the questions asked and the price charged – the more questions asked the lower the premium tends to be because in theory you know more about the person and can price accordingly. It is not a co-incidence that the falling cost of life insurance over the years happened while application forms became ever longer.
So for insurers it is a key part of their competitive strategy.
For advisers, one has to wonder what would happen if we already had a standard form. Let’s assume that a common application form had been the norm for the last twenty years. If an insurer came along and said we’ll knock 5% of the premium if you ask your client these extra 5 questions what would advisers say?
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Kevin Carr is Chief Executive of Protection Review and MD of Kevin Carr Consulting