Illness insurance.

Illness insurance.

v Introduction

Critical illness is a protection insurance which has suffered poor publicity in recent years, largely because of high profile spats between policyholders and insurers over rejected claims. But with rates of cancer and other serious illnesses on the increase, the industry says this cover has a specific role to play in the suite of protection products on the market.

v What is it?

Critical illness pays out a tax-free lump sum on the detection of a defined illnesses or conditions. The lump sum is not designed to replace income but to cover the costs of necessary lifestyle changes, such as modifying a home, or paying off an outstanding debt.

How is it different from other protection products?

Unlike other protection products, including income protection, mortgage payment protection insurance (MPPI) and payment payment protection insurance (PPI), critical illness pays a lump sum, instead of regular amounts. The policyholder does not have to incur loss of earnings to claim.

v Why would I need it?

If you fall seriously ill, state benefits may not be enough to help you out, particularly if you don’t have substantial savings and have large debts, such as a mortgage.

What illnesses are covered?

There are about 30 illnesses, but all insurers must offer cancer, heart attack and stroke, which account for a large proportion of claims. Most insurers will add Alzheimer’s, brain tumours, blindness, HIV, kidney failure, multiple sclerosis, organ transplants, bypass surgery and total permanent disability to their cover.

v There is a history of cancer in my family. Can I get cover?

You will find cover but you will probably have to pay more for it. You need to check that your insurance covers the specific illnesses which run in your family.

What are the common exclusions?

Policies will typically not pay out if your illness, or disability, is linked to alcohol or drug abuse or was caused by taking part in a criminal act or self inflicted. You might find it difficult to claim if you hadn’t followed a doctor’s advice about your condition. HIV transmitted sexually is not covered.

v How do the policies work?

Most providers will allow you to take out cover for life or for a set number of years – for example to cover your mortgage. The policy can be arranged in its own right or can be an add-on to a life insurance policy. The plan ends when the policy pays out or at the end of your term, whatever comes first. The insurer must agree with your diagnosis before it will pay. Lump sums payable from critical illness plans are free of personal tax, but if it is paid to your estate, it may be liable to inheritance tax You can’t get your money back on the policy if you remain healthy for the term.

v What about premiums?

The price of your policy – which can be guaranteed or reviewable – can be worked around how much cover you need, or how much you can afford to pay per month. The size of your premium will depend on your age, sex, health, occupation, whether you smoke, the type of cover you need and how long you need it for.

v What do I need to think about before buying cover?

First you need to consider whether it is suitable insurance for you compared with other protection products. Critical illness can be bought off the shelf, for example in a supermarket, but you can also buy it from a broker or intermediary, who is legally bound to assess whether the product is suitable for you. You need to find a policy which covers the diseases you wish to be covered for, as all insurers differ. You’ll also have to think about how much you want to pay per month and how much you wish to be insured for as these can be individually set.

v What is the claims rejection rate?

It varies between insurers but is typically 10-20 per cent. The Financial Services Authority said recently that more than a quarter of critical illness claims were being rejected – half of those are because of a lack of disclosure.

v Why are claims rejected?

The most common reason claims are knocked back is lack of disclosure, usually about pre-existing medical conditions. Second, policyholders are obligated to keep insurers informed about certain changes to their health regarding family history, alcohol consumption, smoking or drug use. However, the FSA says critical illness is a complex product and firms aren’t doing enough to make customers understand what they need to disclose and the risks of failing to do so. The quality of explanations by advisers of CIC – and the illnesses covered – was also found to be poor by the FSA. Insurers were told they need to make their policy documents clearer.

v What is the industry doing to make critical illness less complex?

The Association of British Insurers, the industry bforms. Work is also underway to improve telephone and internet application procedures, in order to cut the number of declined claims.

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