The Changing Face of the Critical Illness Market

It is common practice when purchasing a property to consider your spouse/dependents in the event of your death. Many want to ensure that when making a significant long-term investment, such as a home, that if they were to die prematurely, their largest liability (their mortgage) is taken care of and their dependents are provided for. This point is substantiated by the fact that in the UK today over 43% of the adult population hold some form of life cover. Yet, when we consider that with modern day medical and technological developments, people are living longer and surviving what were previously deemed to be terminal illnesses, it’s clear to see why term assurance policies have become so much more affordable. Very few however consider the consequences of contracting an illness and its effect not just upon ones physical health but also considering the longer-term financial consequences.

Upon the diagnosis of an illness, one may have to temporarily or even permanently give up work. When considering this, how can you be expected to meet your liabilities? Not just bearing in mind the mortgage but also our other outgoings. For any household these could include utilities, food, travel, school fees, family holidays in addition to the cost of potential medical and hospital related costs. Few people have savings that they can fall back on, and even those who do would see them dwindle rather rapidly without a continual source of income. All factors that illustrate the importance of considering critical illness cover when undertaking ones financial planning needs.

So what exactly does Critical Illness Cover do? It provides the policyholder with a tax-free lump sum, similar to that of a term assurance policy and is paid out upon the diagnosis of a critical illness. Some of the most common being Cancer, Heart Attack, Stroke and Multiple Sclerosis.

The reality lies with the fact that before the age of 65, you are 6 times more likely to contract a serious illness than to die. So why did 3 times as many people take out life cover than critical illness cover last year?

One possible answer is that nobody expects it to happen to them. However, one of the most daunting statistics out there is that 1 in 3 people will contract cancer at some stage during their life according to the Imperial Cancer Research fund – a truly staggering number. Not only that, but over 156,000 people in the UK will suffer a heart attack and over 150,000 will have a stroke this year alone. Yet this is something that very few people prepare for and do not have the financial capability to deal with the consequences of.

Another possible reason for the low number of policies in relation to life cover is the poor public perception of Critical Illness cover. Stories published in the newspaper and even broadcast on television of how when putting in a claim for what one would believe to be a critical illness, insurers have turned around and told policyholders that they are not covered. Most recently an article was published on a bus driver from Derby who suffered a series of infections in his left leg and as a result had to have it amputated. When he contacted his insurer to put in a £500,000 claim he was informed he would have to of had two legs amputated before they would pay-out. BBC’s Watchdog also broadcast a piece on the failings of CI cover after hearing from a number of women who had been declined a pay-out following being diagnosed with breast cancer. This was due to the fact they were diagnosed with Ductal Carcinoma In Situ (DCIS). An early form of breast cancer which has the potential to become malignant and spread, however as it had been caught early, it remains contained and therefore would not qualify for a claim. Most would argue however that these women were not just subject to a highly traumatic experience. They had to take significant time of work to receive treatment and recuperate and should therefore be entitled to some form of compensation. One woman following her mastectomy required a further 8 operations due to complications with her skin, leaving her physically unable to work, yet still she still did not qualify for a claim.

So how is the Critical Illness market responding to such issues? What we are beginning to see in the market is that some insurers such as PruProtect, Royal Liver and AXA are beginning to pay claims out upon a severity basis. What that means is that should you be diagnosed with an illness that is under the terms of the policy, you will receive a payout of between 10-100% of your sum assured. The amount is determined by how serious your illness is and how greatly it could affect your lifestyle. It is not a case of you having to be critical before you receive a payout as with many others in the market. Your cover will not cease after the claim as it would many CI policies, it will continue following the claim and the premiums (if guaranteed) will also remain at the same level you were paying prior to the claim. So in the case of the Derby bus driver who suffered a leg amputation, under PruProtects Serious Illness Cover, he would have received a payout of 75% of his sum assured (£375,000) and his cover would have continued following the claim. In the case of the lady who was diagnosed with DCIS, she would have received 10% of her sum assured to assist with medical care as well as give her the peace of mind to know she wouldn’t have to return to work. Her cover would also continue following the claim so should the cancer return, she would have been able to make another claim.

When one considers other insurance markets, it’s obvious to see how this approach makes basic common sense. With regard to household cover, when a water pipe bursts in your home, you don’t receive the total value of your house. You receive a pay-out in proportion to the damage caused to the property and your cover continues. When your car is involved in a minor collision, you don’t receive a pay-out for the whole car, you make a claim to the value of the damage caused and again, your cover continues.

People want financial protection that they can not only claim on, but also have the cover continue after that claim. Not simply to be told that their condition is not deemed critical enough and if it is, that their cover cease following the claim. It’s clear that severity based payments are the way the market should be headed. A point further substantiated by the fact PruProtects Serious Illness Cover was awarded the Best Critical Illness Provider Award for 2009 & 2010, as well as a DEFAQTO 5 star rating for 2007 through to 2011.

Critical Illness and Life Cover are policies that nobody ever wishes to make a claim on, yet evidence shows they are vitally important and can help support ones liabilities and families’ future. Life cover has always been the leading product in the market in terms of sales, yet what is increasingly evident is the value critical illness can offer, especially given the changing nature of the market.

Michael Rhodes is a Financial Protection Consultant for Genesis Advisory Services (UK) Ltd who are authorised and regulated by the Financial Services Authority and form the protection arm of the Genesis Capital Group of South Africa. To find out more about Serious Illness Cover, get in contact on 020 8387 1331.