Insurers aim to repair the bad image of critical illness cover

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A critical illness can affect anyone. Its consequences can be devastating, not only in a personal sense for the individual and their family, but the effect on finances. If you have a dependent or debt, financial protection is vital.

Critical illness (CI) pays a tax-free lump sum in the event a life-threatening illness is diagnosed. The major causes to claim are:

• cancer 64.8 per cent;

• heart attack and other conditions 18.2 per cent;

• stroke 4.5 per cent;

• Parkinson’s disease and other neurological conditions 4.5 per cent;

• total and permanent disability 1.7 per cent;

• multiple sclerosis 1.1 per cent;

• other (like kidney failure, coma, organ transplant) 5.2 per cent.

However, CI policies can vary greatly and so it is vital to choose the right one and not just the cheapest.

“In the past not all claims were paid,” says Tom Baigrie, CEO at specialist adviser LifeSearch, adding, “insurers have made improvements and last year over 90 per cent of CI claims were paid successfully. This is somewhat against popular opinion which suggests that too many claims are declined, which is not the case.”

Sales fell 21 per cent last year, according to Swiss Re. This probably results from price increases and an incorrect perception of CI insurance.

As the nation’s life expectancy continues to grow, it is estimated that more than one in three will develop cancer.

The good news is that cancer survival rates continue to improve.

Half of those diagnosed today will survive the disease for at least a decade, according to Cancer Research UK. Women with breast cancer now have a 78 per cent chance of surviving at least 10 years compared with only 40 per cent in the early 1970s.

“Unfortunately, improved survival rates have not reduced the negative impact developing a serious illness such as cancer can have on someone’s finances,” warns Mark Jones, head of protection at LV=.

Many can find themselves financially vulnerable at a time when they are physically and emotionally unwell.

Cancer charity Macmillan estimates that four in five people are £570 a month on average worse off as a result of their diagnosis.

This is because their income falls as their expenditure increases in response to the new costs they suddenly have to meet.

Milestones – such as starting a family or purchasing a property – tend to be times when protection is most often considered.

However, Jones says that “the best time for anyone to take out protection products, such as CI cover, are when they have youth on their side.”

This is because they are less likely to have suffered any major medical event, thereby making cover cheaper.

CI was originally developed for worst case scenarios to help pay large medical bills. Today the pay-outs can cover all the other financial commitments that people still have to meet.

Insurers increasingly aim to offer meaningful, quality protection. Over the years, the number of illnesses that policies cover has significantly increased. Traditionally, CI cover paid either the whole amount or nothing.

In recent years there has been a strong trend for providers to offer more partial payments to those with early stage conditions.

Half the market now pays a reduced amount for less serious conditions, such as 15 to 25 per cent of the overall sum. Such much-needed financial support runs for a period of time even if the condition diagnosed may not qualify for a full payment.

The Association of British Insurers says that last year 16,496 CI claims were made of which 91.8 per cent were paid, amounting to over £914.8m. The average claim paid was £60,400.

CI is a field where an independent financial adviser is really necessary. Such a person can offer good guidance.

The choice of provider, not only on grounds of financial strength and willingness to pay claims, but on their policy wording is vital.

Every few years the association updates its standard for best practice which determines how severe a condition needs to be in order for a claim to be paid.

Ask your adviser to look at policies which offer even better definitions than the industry minimum and do not be over-reliant on the number of conditions offered.

An example of refusal to pay is where someone who suffered from epilepsy caused by a lesion in the brain was declined because the provider considered it was the wrong type of tumour.

The condition caused seizures two to three times a month. As a result the person, who had taken out a CI policy for six years, could no longer drive and had problems which made it difficult to either work or care for her children.

Bright Grey refused payment on technical grounds as the consultant reported that the lesion had been present since birth.

Whilst it is standard practice that pre-existing conditions are excluded or, at least, have to be reported and accepted, a provider that relies on such a tight interpretation ought to be given a wide berth.

In the past premiums differed on ground of gender. This was outlawed 18 months ago following an EU Directive.

Today, premiums are the same for male and female but “some policies are better for women and some better for men”, says Kevin Carr, chief executive of Protection Review.

One concern is the level of medical enquiry some providers undertake. Personal details should only be requested that are relevant to CI. Both Aviva and Legal & General routinely make ‘subject access requests’ for all medical records held by a GP rather than seek specific information.

If a family is insuring for CI, include all members.

An IFA will advise which providers cover children and whether the range of qualifying conditions matches those for adults as some are noticeably shorter.

LV=, for instance, changed last year to cover all those available to adults.

Don’t worry if you accidently fail to declare information that has not been asked for.

In the past providers used such positions to deny payments. Aviva refused to pay a CI policy to a mother of two who developed breast cancer because she inadvertently omitted to say she had postnatal depression.

Since April 2013, under the Consumer Insurance Act, such ‘non-disclosure’ is no reason to refuse payment.

Comparing premiums, low initial cost is available but with an annual increase of usually five to 10 per cent.

If a couple, avoid a joint life policy as only one claim will be paid and the saving is only about five per cent.

For a non-smoker 40 years next birthday for £100,000 over 25 years, monthly rates including term assurance, according to Moneyfacts, range from £38.93 (Beagle Street) to £69.76 (Forester Life) with £52.35 average.