Critical Illness Insurance is still a relatively new type of insurance and was first introduced in South Africa in 1983.  The founder was Dr Marius Barnard.  It is interesting that it was a doctor who saw the benefits of a policy that would pay out lump sums to people diagnosed with life threatening illnesses rather than an insurance company.  Dr Marius obviously saw first hand just how devastating a critical illness could be not only physically and emotionally but also financially.

Since its launch many life assurance companies have launched their own critical illness policies but to be fair these did vary in the early days with the illnesses that they covered.  The Association of British Insurers helped matters by putting together a standard list of illness and the insurance definition of the illnesses covered so that both life assurance companies and their customers could easily see just what the definition of a particular illness was.

Because there was early confusion as to what the definition of an illness was, critical illness claims settlement history was erratic.  Also, because this policy was based on medical history there were a high number of claims rejected based on non-disclosure where customers had not declared previous medical conditions that might have affected the underwriting of the policy.  Thanks to the ABI definitions and the adviser community educating customers both the claims settlement history has increased year on year and the non-disclosure rejections have decreased at the same time.  It is always better to declare everything so that an underwriter has a complete picture to base cover on.

Each year life insurance companies release their claims settlement history in an effort to be transparent.  They publish the amount of claims they have successfully paid out on, the total amounts, the average claim size, average age of claimant but more importantly they publish data on the amount of unsuccessful claims.  The unsuccessful claims are a result of non-disclosure or the illness not meeting the required definition.  According to Moneyfacts insurers paid out an average of 90.8% of all claims last year.  This is an average across the insurance companies so some did better than others.  Legal & General paid out 93.6%.

Enter the term critical illness payouts into Google and you won’t have to go far before your are reading horror stories about life insurance companies not paying, or articles telling you that policies rarely pay out.  These types of stories will always be there because they are true.  The life assurance companies have already told us about the claims they rejected and why.  Some of those rejects will be justified but some will have a case to argue and where better than the internet?

The simple fact of the matter is that critical illness policies are designed to pay out when you need them most, when you are diagnosed with an illness that is so threatening that it changes your life permanently in most cases.  A lot of people who have claimed on their critical illness policies do not return to their normal occupation yet they still have homes and bills to pay so a lump sum benefit can be very welcome.  One of the reasons people decline critical illness is the cost.  If cancer research tell us that we still have a 1 in 3 chance of being diagnosed with some form of cancer during our lifetime then that is something worth insuring against.  It is clearly going to cost more than life assurance.

So is critical illness cover worth it?  There is no definitive answer to this question.  Policies not being paid out is no longer an excuse for people to decline cover.  There will always be people who are worried enough about their homes and lifestyles to bet against a 1 in 3 statistic and then there will be those prefer to take their chances.  Which one are you?

There is a big difference between premiums for life insurance and critical illness insurance and this is the main hurdle for people to understand.  Life insurance premiums keep on getting cheaper due advances in medical science.  We are living longer and the illnesses that used to be killers are now treatable in most cases so premature death is becoming less likely each year.  Critical illness, on the other hand, covers those illnesses that used to be killers so the premiums are going up all of the time.  Cancer Research say that we all have a 1 in 3 chance of being diagnosed with cancer at some stage in our lifetimes.  It’s perfectly natural for an insurance company to want to increase premiums with statistics like these because it means that they have a 1 in 3 chance of having to make a payout.

So critical illness costs a lot more than life insurance so why then should we have it along side our mortgages?  It goes back to statistics.  The illnesses covered by critical illness policies can be life threatening but but every year that probability goes down due to advances in medical science.  The death rate for cancer, for instance, has dropped by 20% over the last 15 years.  Death rates may be dropping but we are still being diagnosed and in some cases illnesses are more likely due to our current lifestyles.

Critical illness insurance takes care of you while you are still alive.  Being diagnosed with a critical illness usually means that you cannot work during treatment and chances are that you may not be able to return to work in the same capacity after treatment.  During this time you still have to pay your mortgage.  A mortgage is the biggest longest financial commitment people usually make so why risk losing your home because you have been diagnosed with a critical illness?

Statistically critical illness insurance makes far more sense for anyone with a mortgage than life insurance.  People just need to understand why and that it is worth paying for that peace of mind where their home is at stake.

It’s taken a long time for Critical Illness Insurance to get a good name and the insurers need to do everything they can to make it stay that way.  Of course selling direct will always be better for profits but it is a careful balancing act if it means that bad press could eventually come from disatisfied customers when they try to make a claim and find that their policy might not have been what they’d hoped for.

We recently published a comparison table of what the major Critical illness providers cover in their policies.  Click here if you would like to see it. 

It should also be the client’s responsibility to make sure that they are clear what they think they are buying.  There are always those who just want to find the cheapest product and then complain about it later when it doesn’t work out.  Critical Illness Insurance is like anything else.  You get what you pay for.  Even then you can still get a great product for a great price.  We currently waive 50% of our commission for online enquiries.  This 50% is put back into the policy which makes the premiums cheaper but the client has still had advice.

The bottom line is that critical illness can be an expensive policy to maintain over a long term so people owe to themselves to make sure that they are getting the best policy possible for their money.

What about critical illness insurance?  Does this fit into a business protection plan?  The answer is yes and perhaps it makes more sense than the life assurance requirement.  We all know we are going  to die but how many people die prematurely, ie, before old age and natural causes?  Statistically critical illness is far more likely to happen during our working lives.  Cancer Research UK states that we all have a 1 in 3 chance of being diagnosed with some form of cancer in our lifetimes so surely this is something worth insuring against?  You only have to look at some of the statistics to see that critical illness insurance does have a place in business protection insurance planning.

In the UK, one in three people develop cancer in their lives and one in four will die from it. In total in 2004, 152857 people died from from cancer in the UK. There are 289000 new cases of cancer diagnosed each year.
Source – National statistics online and cancer research website 2006.

In the UK, the lifetime risk for breast cancer in women is one in nine. In 2005 45500 women were diagnosed with breast cancer.
Source – Cancer research website 2006

In 2005 in the UK, 1 in 5 men and 1 in 6 women died from heart disease
Source – British Heart Foundation

Someone has a heart attack in the UK every 2 minutes and almost 2.6 million people have heart and circulatory disease.
Source – British Heart Foundation.

In the UK one person has a stroke every five minutes
Source – The Stroke Association website.

Every year, at least one in 13 deaths in the European Union is likely to be related to excess weight.
Source – Infant and Dietetic Foods Association.

Over 1.65 million people will be off work due to illness each year for 6 months or more

Around 120,000 people have Parkinson’s Disease and 1 in 7 are under 40 when diagnosed.

Coronary Heart Disease is responsible for 12% of all working days lost through sickness.

There are now over 700,000 people with dementia. By the year 2010 if the current trend continues this figure is expected to reach 850,000

Approximately 8,500 people in the UK suffer a Brain Haemorrhage each year, with 3 or 4 out of 10 patients being left with long-term problems

Around 350,000 people have rheumatoid arthritis.
(Arthritis Research Campaign, 2002)

There are currently approximately 85,000 people with MS. Each year, around 2,500 individuals are newly diagnosed. MS is the most common neurological disorder among young adults. People are usually diagnosed between the ages of 20 and 40, but can be older. (Multiple Sclerosis Society, 2002)

In America critical illness cover exists and is a popular product but at the same time it competes to a certain extent with cancer insurance.  That’s right, there are two plans to choose from.  Cancer accounts for approximately 60% of critical illness cover claims yet it is only one of at least 22 illnesses covered by most critical illness policies.  One of the reasons for people declining critical illness cover is cost, so would it make sense for providers to also offer a cancer only product?  By doing this there would be no confusion as to what was covered within the policy.  The providers could still use the ABI standard definition of cancer.  Obviously the policy would be slightly cheaper than a standard critical illness policy as only one definition would be covered but it could mean that if there was a greater take up then more people would be covered against the number one critical illness definition.

The motor insurance industry has been splitting policy cover for a long time in an effort to make policies more appealing to those on a budget.  you can have fully comprehensive with windscreen cover, breakdown cover, replacement car and legal expenses if budget isn’t an issue but if it is you can simply opt to remove extras you don’t wish to pay for.  Maybe this option might work for the critical illness providers too.

• Total number of claims paid – 1514
• Total percentage of claims paid  – 86.7%
• Average payout  – £75750
• Largest claim – £552487
• Average age of claimant – 44
• Average months in force before claim – 73
• Cancer accounted for 60% of claims
• Childrens cover was the fifth highest claim category with 65 claims

Of course there were unpaid claims too as with all other insurers. These were a combination of non-disclosure and the claim not meeting the critical illness definition. 180 cases (10.3%) did not meet the required definition in order to make the claim whilst 53 cases (3%) were declined due to non-disclosure.

When Cancer Research state that everyone has a 1 in 3 chance of being diagnosed with some form of cancer at some stage in their lifetimes and you can be absolutely sure that it will never be you then no, Critical Illness Insurance might not be for you.  If you are told that every five minutes, someone in the UK has a stroke and that information does not worry you as you know that it will never be you then critical illness isn’t for you.  When you hear that 1 in 5 men and 1 in 6 women will suffer from heart disease and you can be certain it won’t be you then save your money and don’t buy critical illness cover.  There are plenty more statistics to mention and plenty more critical illnesses (PruProtect will cover over 150 conditions) but if you don’t feel that they are not applicable to you then critical illness cover will never make sense.

For those people who feel that they don’t need critical illness cover it is a blessing to be so confident that they will never suffer any of the illnesses covered in these policies.  There are a lot of people who are worried about critical illnesses and that’s why they have cover.  These people have homes with mortgages, they have families to support, they have bills that have to be paid each month whether they are healthy or not.  Personally, I can’t be that confident that critical illness will never affect me which is why I have cover.  Hopefully, I will never have to claim on it.  For those people who still feel that they don’t need cover, good luck and I hope you have made the right choice.

If you have read other articles in this blog you will note that all of the larger insurers are returning similar results where claims are up and rejection are down.  Scottish Equitable said that 41% of claims rejected were due to non-disclosure and the remaining 59% were due to the illness not meeting the required critical illness definition.

Scottish Equitable put this successful turn-around down to working closely with advisers and IFAs to ensure a better understanding of the product.  Hopefully this trend will continue and understanding of this complex product will continue to improve which will, in turn, help people interested in this type of insurance.

“We are committed to ensuring that our customer’s understand their purchase, but it is up to the whole industry, both providers and advisers, to help customers understand the cover they buy,” said Michael Whyte, chief underwriter for Norwich Union.

It is interesting that Michael mentioned advisers in helping customers to understand the product they are buying.  One of our recent articles discussed the topic of insurers offering critical illness without advice through their own dedicated web portals.  Clearly Michael sees the advantages to having advisers recommending critical illness insurance as this process will only increase claims payouts in the future together with declining cases of non-disclosure and claims not meeting the required definition.  Critical illness insurance is a complex product and people need to know exactly what they are paying for.  Advisers are the only ones qualified enough to be able to make these recommendations between the different plans on the market.

Roger Edwards, proposition director at Bright Grey, said: “We need to recognize that a certain segment of the population is using the internet to buy protection without professional advice. This group chooses the Internet-only approach to buy and wouldn’t look to buy in any other way. Until now there hasn’t been a product that offers life or critical illness cover specifically tailored to this group of people, where they can complete the whole process online.

Roger is quite correct.  There are people who just want to do the whole process online without actually speaking to anyone or taking advice but at what cost?  The main reason the insurance companies have launched these sites is due to price comparison sites.  It’s true to say that life assurance has always been a rate driven product.  There is only one reason it will ever payout so the cheapest premium is usually the best product to go for.  You could argue that customer service comes into the equation, which might mean that someone chooses a slightly higher premium based on an outstanding customer service record but most people applying over the internet wouldn’t know which provider had the best customer service.

Critical illness, on the other hand, is not a rate driven product as far as professional advisers are concerned.  The differences in cover between two critical illness providers can be large even though they might both offer the same premium.  Also, customer service and claims settlement history do come into the equation for an adviser when recommending a critical illness policy. 

Critical illness cover has improved over the years and life assurance companies now payout more than ever thanks to an understanding of the product from both advisers and policy holders.  Making critical illness a rate driven product with no advice could potentially damage the good work that has been done.  There could be more cases of insurers not paying out due to non-disclosure at the point of application.  This would only damage the reputation of critical illness and make future sales harder.

From an advisers point of view I would say that critical illness insurance is something that should be advised.  If you are intending on paying premiums for insurance the least you should do is know what you are paying for regardless of what the premium is.