Critical illness insurance is a form of life insurance that pays out a lump sum on diagnosis of a critical illness that meets the insurer's strict policy definition.
Last updated by Andy Couchman November 2016.
Critical illness insurance is a form of life insurance that pays out a lump sum on diagnosis of a critical illness that meets the insurer's strict policy definition. It does not cover all critical illnesses, only those defined in the policy (although the vast majority are covered and there is no general definition of what a "critical" illness is). Most policies also include life cover too and many also include other forms of protection insurance such as income protection (so-called menu or multi-plans).
Most critical illness insurance is written by life insurance companies and the majority of life offices now have at least one such policy within their portfolio. The law as it affects life insurance also applies to critical illness insurance. It is also possible for a general insurance company to write critical illness insurance (see below).
Unlike life insurance, critical illness insurance has a great appeal to single people and those without dependants. Its main use is to protect a mortgage.
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Critical illness insurance was first developed in South Africa in the early 1980s, although policies covering single conditions, such as cancer, were in existence for some years prior to that. It was introduced into the UK in 1985. More than 60 UK insurers now offer one or more critical illness policies and over 5m policies are in force, covering over 12m people, according to the Association of British Insurers (ABI).
However, sales fell sharply after peaking in 2003. For example, ABI data shows that sales of critical illness rider policies (see below) hit 992,000 in 2003, then fell to 392,000 in 2008, before recovering to 460,000 policies in 2015. Sales of stand-alone critical illness insurance fell from 112,000 in 2001 to 19,000 in 2015.
One reason for lower sales in recent years is a slowdown in mortgage lending since the market's peak in 2007 (before the credit crunch and subsequent recession). Roughly half of all mortgage-related term insurance sales also include CI cover. For non-mortgage related term insurance, CI makes up around one in four policies sold. CI cover without life cover has become less popular, with very few such policies now sold.
CI makes a difference to many people's lives, with over 17,000 CI claims paid out in 2015, for a total of over £1.1 billion, and with an average claim of £66,186, according to the ABI.
Types of insurance
Critical illness insurance may be written as a standalone policy or as a rider to another policy (also known as an accelerated plan).
Standalone policies pay no benefits on death and are either:
- term-insurance based with cover limited to a specific number of years; or
- whole-of-life based with cover continuing for as long as premiums are paid.
Benefit is subject to survival for 14-30 days after claiming so, if death occurs say a week after a claim is made on a standalone policy, no payment will be made by the insurer. The logic for this is that if a payout was needed on death, life insurance with CI cover not CI on its own is needed.
Accelerated or rider policies' benefit may attach to:
- a term insurance policy (the most common option);
- a whole-of-life policy (around 1 in 20 such policies in 2015);
- an endowment policy (now very rare as very few endowment policies are sold), or
- a general insurance policy such as private medical insurance.
The sum insured may be level, increasing (often in line with inflation) or decreasing (usually in line with the outstanding capital on a repayment mortgage or at a preset interest rate). The sum insured is usually payable as a cash lump sum rather than as an income.
Where critical illness insurance is written as a long-term policy, premiums are usually set for a number of years and either subject to a periodic review (reviewable), or guaranteed not to change throughout the term (guaranteed). With reviewable policies, premiums may rise (or the sum insured may be reduced) if the insurer experiences or expects to experience poorer than anticipated results (usually claims, but the insurer may also take account of factors such as investment returns and changes in average earnings). Conversely, premiums could actually fall after a review if experience has been better than expected or a more optimistic view is taken of future trends.
Critical illness insurance may also be written as general insurance, when it is usually written as an annually or monthly renewable contract and the premiums are subject to insurance premium tax (IPT). Such policies are often cheaper initially but premiums may rise each year. The insurer may also have the right to discontinue cover or to offer amended terms at as little as one month's notice.
CI policies for individuals will be one of:
- Own life
- Life of another(e.g., a wife taking out a policy on the life of her husband)
- Joint life. The benefit will be payable on the first event or death, after which the policy will; usually stop. As this could leave the survivor with little or no cover, it is often advisable for couples to each have their own cover, even if this is slightly more expensive.
In the case of group CI, the policy is usually taken out on the life of the employee, with the benefit payable to the employee. Premiums will be wholly or partially paid by the employer or by the employee, usually with premiums collected by the employer though salary deduction.
ABI statement of best practice
The ABI first published a statement of practice on critical illness insurance in 1999. Subsequent versions have looked to improve clarity and to future-proof medical definitions. Model definitions and exclusions have also been developed and included following extensive consultation with the industry, the public, medical charities and others.
The latest statement was issued in 2014 and now includes definitions on total and permanent disability (TPD) and the difference between additional and partial payments among other changes.
It is probable that, although intended to be "future-proof", the ABI's definitions will continue to change in future, especially as medical science and understanding develops and as better tests to spot and treat potentially serious conditions are developed. In addition, there is still no 100% effective "catchall" definition to pick up all critical illnesses that a reasonable person might expect critical illness insurance to cover.
Critical conditions covered
Unlike many other health and protection insurances, policies pay out on diagnosis of one of a specified number of critical conditions (see table below), regardless of how well or quickly the claimant recovers - it is necessary only that the event insured against has occurred and that the policy definition has been met in full.
Up to 40 or more conditions may be covered and some insurers now cover over 100. Prior to April 2006, these were divided into three groups, covering core conditions, an additional 13 conditions that also had an ABI standard definition and a group of others that did not. They now fall into two main groups:
- those that meet or exceed the ABI model definitions, designed to protect consumers
- other conditions, which (as yet) do not have an ABI definition.
The list of 23 model definitions was published in the ABI statement of practice in April 2006 and made mandatory for ABI member companies from April 2007. The headings are as follows (for most conditions there is an explanatory suffix and for some an optional age limit, typically 60):
- Alzheimer's disease [before age x] - resulting in permanent symptoms
- aorta graft surgery - for disease
- benign brain tumour - resulting in permanent symptoms
- blindness - permanent and irreversible
- cancer - excluding less advanced cases
- coma - - with associated permanent symptoms
- coronary artery by-pass grafts - with surgery to divide the breastbone
- deafness - permanent and irreversible
- heart attack - of specified severity
- heart valve replacement or repair - with surgery to divide the breastbone
- HIV infection - caught [in the UK] from a blood transfusion, a physical assault or at work in an eligible occupation
- kidney failure - requiring permanent dialysis
- loss of speech - total permanent and irreversible
- loss of hands or feet - permanent physical severance
- major organ transplant - from another donor
- motor neurone disease [before age x] - resulting in permanent symptoms
- multiple sclerosis - with persisting symptoms
- paralysis of limbs - total and irreversible
- Parkinson's disease [before age x] - resulting in permanent symptoms
- stroke - resulting in permanent symptoms
- terminal illness - where death is expected within 12 months
- third degree burns - covering 20% of the body's surface area
- traumatic brain injury - resulting in permanent symptoms.
Many insurers now use an "ABI+" definition. Here, an insurer must meet the standard ABI model definition for a particular illness, but then modifies it to widen the scope of the definition so that, potentially, more people will be able to claim under that heading. ABI+ definitions for some conditions are now a key marketing differentiator for many insurers. However, it is rare for an insurer to indicate just how much better or wider their definition is. An ABI+ definition could therefore result in a significant number of extra claims being payable every year or none at all. To counter the accusation of a 'conditions race' (where an insurer looks to add more conditions, regardless of how many people are likely to suffer from them just to have an impressively long list), some insurers are now consolidating similar conditions under a single generic heading. For example, 'Parkinson's Plus Syndromes' includes five separate conditions: multiple system atrophy, progressive supranuclear palsy, Parkinsonism-dementia-amyotrophic lateral sclerosis complex, corticobasal ganglionic degeneration and diffuse Lewy body disease. This can make comparison very difficult, even for those familiar with this type of insurance. A number of organisations now offer comparison services including the specialist CIExpert.
Other critical illnesses may be covered too. These do not (yet) have an ABI model definition, and some may effectively be included under total and permanent disability (TPD), at least in their later stages. For example, someone with chronic rheumatoid arthritis might eventually become permanently and totally disabled and so able to claim under the TPD heading, even if their insurer does not separately cover chronic rheumatoid arthritis. A typical example of the conditions covered by a CI policy (in this case, that from LV= in October 2016) are shown below:
- Alzheimer's disease or other forms of dementia - resulting in permanent symptoms
- aorta graft surgery - for disease or traumatic injury
- aplastic anaemia - complete
- bacterial meningitis - resulting in permanent symptoms
- benign brain tumour
- benign spinal cord tumour - resulting in permanent symptoms
- blindness - resulting in permanent symptoms
- cancer - excluding less advanced cases
- cardiac arrest
- cardiomyopathy - of specified severity
- coma - with associated permanent symptoms
- coronary artery bypass grafts
- Creutzfeldt-Jakob disease
- deafness - permanent and irreversible
- encephalitis - resulting in permanent symptoms
- heart attack - of specified severity
- heart valve replacement or repair
- HIV infection- caught in a specified list of countries from a blood transfusion, a physical assault or at work
- Idiopathic pulmonary arterial hypertension - of specified severity
- kidney failure - requiring permanent dialysis
- liver failure;
- loss of hands or feet- permanent physical severanc
- loss of independent existence- unable to look after yourself ever again
- loss of speech- permanent and irreversible
- major organ transplant- from another person
- motor neurone disease- resulting in permanent symptoms
- multiple sclerosis- with persisting symptoms
- multiple system atrophy- resulting in permanent symptoms
- neuromyelitis optica (Devic's disease)- with persisting symptoms
- open Heart Surgery- with surgery to divide the breastbone
- paralysis of a limb- total and irreversible
- Parkinson's disease- resulting in permanent symptoms
- Parkinson Plus Syndromes- resulting in permanent symptoms
- pneumonectomy- removal of an entire lung
- progressive supranuclear palsy- resulting in permanent symptoms
- pulmonary artery surgery- for disease only
- severe lung disease
- stroke- of specified severity
- surgical removal of an eyeball
- systemic Lupus Erythematosus
- terminal illness
- third degree burns- covering 20% of the body's surface area or affecting 50% of the area of the face or head
- traumatic brain injury- resulting in permanent symptoms
This policy also included a number of additional partial payment conditions:
- accident hospitalisation cover- (lower of 25% of cover and £25,000)
- Arteriovenous Malformation (AVM) of the brain- with specified treatment (lower of 12.5% of cover and £12,500)
- carcinoma in-situ of the cervix uteri -requiring treatment with hysterectomy (lower of 12.5% of cover and £12,500)
- carcinoma in-situ of the urinary bladder- (lower of 12.5% of cover and £12,500)
- carotid Artery Stenosis- treated by Endarterectomy or Angioplasty (lower of 12.5% of cover and £12,500)
- cerebral Aneurysm- with surgery or radiotherapy (lower of 12.5% of cover and £12,500)
- central retinal artery or vein occlusion- resulting in permanent visual loss (lower of 12.5% of cover and £12,500)
- coronary artery angioplasty- with specified treatment (lower of 25% of cover and £25,000)
- diabetes mellitus Type 1- requiring permanent insulin injections (lower of 12.5% of cover and £12,500)
- ductal or lobular carcinoma in-situ of the breast- with specified treatment (lower of 25% of cover and £25,000)
- non-severe cardiomyopathy -definite diagnosis (lower of 25% of cover and £25,000)
- ovarian tumour of borderline malignancy/low malignant potential- with surgical removal of an ovary (lower of 12.5% of cover and £25,000)
- partial loss of hearing- of specified severity (lower of 12.5% of cover and £12,500)
- partial loss of sight- permanent and irreversible (lower of 12.5% of cover and £12,500)
- partial third degree burns- covering 10% of the body's surface area or affecting 25% of the area of the face or head (lower of 12.5% of cover and £12,500)
- prostate Cancer- (lower of 25% of cover and £25,000)
- removal of one or more lobe(s) of the lung -for disease or trauma (lower of 12.5% of cover and £12,500
- severe Crohn's disease -surgically treated (lower of 12.5% of cover and £12,500)
- severe ulcerative colitis -with operation to remove the entire large bowel (lower of 12.5% of cover and £12,500)
- testicular carcinoma in-situ - requiring surgery to remove at least one testicle (lower of 12.5% of cover and £12,500)
Each insurer and each CI policy will have its own list. In some cases more or fewer conditions may be covered or a policy may have some additional conditions but not cover some on the above lists.
As at October 2016, the most conditions covered by an insurer was VitalityLife's 174 conditions, which compared to an industry average of 45 conditions covered. However, some of those conditions covered would pay out as little as 5% of the policy's sum insured. Such partial or additional payments generally apply to more minor conditions or to early stages of more serious conditions. This approach may be termed 'serious illness cover' to differentiate it from more conventional CI cover where the emphasis is on fewer conditions but payment of 100% of the sum insured.
At the other end of the scale, in 2016 AIG Life launched a policy that just covered the 'big three' critical illnesses - heart attack, cancer and stroke (which together typically make up over 80% of CI claims) and other insurers offer policies that just cover cancer.
When considering what type of cover to have, such budget plans (fewer conditions covered generally means simpler underwriting and lower premiums) offer the advantage of being easier to understand, are often easier to buy and may be considerably cheaper. However, if the individual then suffers a critical illness that is not covered, the policy would pay out nothing at a time when a more comprehensive plan would have done.
In addition to listing which conditions the policy covers, many policies include total and permanent disability (TPD). These are illnesses and medical conditions where there is no long-term prospect of recovery and where the insured is totally disabled. Until 2011, insurers adopted a number of definitions for total and permanent disability, usually involving an assessment of the insured person's ability to perform certain everyday tasks. Since then the ABI's Statement of Best Practice (SoBP) for CI insurance has included five standard definitions of TPD, together with descriptive headings. These are:
- Total permanent disability - unable [before age x] to do your own occupation ever again
- Total permanent disability - unable [before age x] to do a suited occupation ever again
- Total permanent disability - unable [before age x] to do any occupation at all ever again
- Total permanent disability - unable [before age x] to do 3 specified work tasks ever again. The works tasks are walking, climbing, lifting, bending, getting in and out of a car and writing
- Total permanent disability - unable [before age x] to look after yourself ever again
In all cases, an age limit may apply to the definition.
The SoBP also allows that, if the definition used relies on the customer's occupation, that may be either:
- re-underwritten when notification of the change is then required, or
- ignored; or
- the benefit may be based on the original occupation.
If insurers require notification of changes in occupation, the SoBP also provides that they "should periodically remind the policyholder". "Periodically" is not defined in the SoBP.
The ABI's model critical illness and TPD definitions aim to provide consistency and accuracy for customers. ABI member companies must use the model definitions but are free to offer more cover, for example by omitting an exclusion or by showing separately the additional cover offered. Indeed, one recent trend has been insurers promoting 'ABI+' definitions. Typically, an insurer will offer a wider definition of one or more (but invariably not all) ABI definitions. Such ABI+ definitions should result in more people being able to claim for that condition which, in turn, should create a competitive advantage for that insurer.
The current 23-page ABI SoBP for CI cover, published in 2014, can be viewed online. In future the SoBP is likely to be updated again and the ABI website will probably announce any proposed or actual changes.
Some policies allow a choice of cover. Cover for a limited number of conditions is cheaper although, as the vast majority of claims are covered by the ABI's list, the cost of adding more conditions does not go up in proportion to the number of conditions covered.
Severity based cover
Some insurers now offer severity based CI cover. Under such policies, the benefit paid under some conditions will depend on the severity of the condition - the greater the severity, the greater the payment. If the condition worsens, a second or subsequent payment may also be made.
The advantage of this approach is that more conditions can be covered, and customers are more likely to make a claim (or more than one claim) during the lifetime of their policy. The main disadvantages are greater complexity and cost and, in some cases, a payout may be less than under a policy that does not have severity-based definitions.
In some cases, an insurer may add a few new conditions or improved conditions (for example, paying out on lower-grade breast or prostate cancers). In other cases, an insurer might cover a number of additional "serious" conditions on top of its list of "critical" conditions.
The benefit payable on serious illnesses will often be significantly less than the plan's full sum assured. To further complicate matters, insurer A may pay out, say, 25% of the sum assured because its serious illness condition definition has been met, while insurer B would pay out 100% because the claimant has met the definition for its ABI+ definition or pay out nothing because the severity is not great enough.
Partial and additional payments
The ABI CI SoBP defines additional and partial payments as:
- Additional payment- this is where a claim payment made under a definition does not reduce the amount of benefit remaining.
- Partial payment- this is where a part payment made under a definition does reduce the amount of benefit remaining.
- Where a condition may be either 'additional' or 'partial' dependent upon different circumstances, (as seen with products with multi-level benefits), the terms above may be reasonably modified to enhance consumer understanding.
In other words, an additional payment is one where the insurer pays out and the policy's sum insured continues unaltered, whereas a partial payment is one that reduces the policy's remaining sum insured.
Benefit is usually payable in the UK or any other European country and in some other countries worldwide - usually those where English is spoken and/or where there is a well-established, corruption-free high quality medical system.
Most insurers have an age range at outset of 16-19 up to an upper age of 60-80, although some critical illness definitions themselves have upper or lower age limits. For example, diabetes mellitus may only be covered from age 45, while permanent and total disability is usually only covered to age 60 or 65.
Dependent children (including adopted children) may be covered under some policies, usually from a minimum age (say age one or three) until age 18 (or perhaps 21 if in full-time education) and only for certain conditions. Often these conditions will include those most associated with children, such as bacterial meningitis, not all of which may be covered for their parents. Congenital conditions are excluded. Children's cover is usually limited to a maximum of £15,000 to £25,000, but is often included at no extra cost.
Most policies have exclusions and the ABI has developed model wordings for these too. The model exclusions are:
- alcohol or drug abuse
- child cover - pre-existing medical conditions
- criminal acts
- flying (other than as a passenger in a commercially licensed aircraft)
- hazardous sports and pastimes
- HIV/AIDS (except where specifically listed as a covered condition, for example if contracted from a UK blood transfusion)
- living abroad (outside the EU for more than 13 consecutive weeks in any 12 months)
- self-inflicted injury
- unreasonable failure to follow medical advice
- war and civil commotion.
Some policies may have an initial waiting period - for example, a claim will not be paid if it arises in the three months after the policy is taken out. This is designed to avoid early claims where the insured is already aware of a condition but has not sought medical treatment for it.
Critical illness policies generally terminate on the payment of a claim. Buy-back allows customers to continue life and/or critical illness cover after they have made a critical illness claim. A minimum period (usually one to two years) must elapse after the claim is paid before this option may be exercised. The condition leading to the claim will no longer be covered.
If an additional payment has been made by the insurer to the customer, this has no effect on the policy's sum insured, which continues as normal.
Benefits can often be increased without further medical evidence every year, usually in line with increases in average prices or earnings, sometimes subject to a maximum annual increase (often 10% a year).
Some policies also allow one-off underwriting-free increases (up to certain financial limits) on a life-changing event happening, such as marriage, the birth or adoption of a child or moving home and taking out a bigger mortgage. This is often referred to as a guaranteed insurability option.
Many policies include a link to the Retail Prices Index (RPI). In some periods (e.g. during 2009), the RPI was negative (i.e. a period of deflation, when many prices actually fell). For this reason, if a policy's sum insured is linked to changes in the RPI, if RPI falls, then so would the cover under that policy. To avoid that, the insurer may link the sum insured only to rises in the RPI. In such cases, if the RPI is a negative figure, the sum insured will remain the same.
Most critical illness insurance is taken out by individuals. The group market is expanding though and group cover is often offered as part of a flexible benefits (flex) arrangement, where the employee can choose the benefits package that best suits their personal circumstances. Group critical illness policies are usually taken out by employers on the lives of employees with benefits payable to the individual. Such benefits are usually taxable in the hands of the employee (as a P11D benefit) to the extent of the premium paid by the employer.
Despite considerable growth in the market, sales of group critical illness insurance are still considerably lower than for, say, group life or group income protection.
Underwriting and ratings
Underwriters are most interested in the applicant's age, health and medical history. Prior to 21 December 2012, gender was also a major rating factor but it is now illegal to discriminate on gender grounds on individual policies. Family medical history is also important, especially where there may be evidence of a genetic disposition towards certain conditions. Occupation is generally less important than health, except for total and permanent disability and any waiver of premium benefit.
Any higher risk may result in an extra premium and/or particular conditions may be excluded. Underwriters also now ask more "lifestyle" questions in order to build up a better understanding of a customer's attitude to risk and health. Many insurers use tele-underwriting or tele-interviews too. These enable information to be gathered more quickly and easily (over the phone) and experience shows that there tends to be less non-disclosure too. 'Big T' Tele-underwriting is where the interviewer asks all medical questions over the phone. 'Little t' tele-underwriting is where medical questions are still asked on an application form, and the tele-interviewer than asks supplementary questions over the phone.
The underwriter may decide to offer:
- Ordinary rates
- Ordinary rates but with one or more exclusions under the policy. In some cases the premium may be reduced to reflect the narrower cover now offered e.g. a premium reduction if, because of a previous cancer experience or family history, the insurer will not cover cancer claims under the policy. The underwriter may choose to exclude certain benefits (e.g. waiver of premium and/or guaranteed insurability options) or certain medical conditions or both.
- Extra premium. This may be permanent or temporary.
- A higher rate because the customer is a smoker.
- Postponement - cover will not be available before a particular date e.g. after a pregnant woman's child has been born.
- Decline - the insurer will not offer any cover.
In the event of an adverse decision, the customer could apply to another insurer for cover. Today's very competitive market means that the lowest premiums are generally only available to some customers. An insurer with higher premiums may be prepared to offer n o or a lower rating than one that aims to offer cheapest cover to the best risks.
Even after a policy starts, a customer may be able to go back to the insurer to ask for a revised rating. Where the risk has reduced (e.g. the customer gave up smoking and has not smoked for more than a year) the insurer may be prepared to offer better terms. Any additional underwriting costs may be at the customer's expense. If the insurer is not prepared to offer better terms, the customer could look to another insurer for cover. However, being older may negate any potential saving, while care also needs to be taken to ensure the new policy offers at least as much cover as the old policy.
Most critical illness insurers now publish information on how many claims they have paid and for what reason. The data is usually in the form of a sales aid or press release and effectively supports an adviser who recommends a product or enables a would-be customer to check online. The adviser can show what an insurer's claims record on critical illness actually is. Some intermediaries may also produce a useful snapshot of this data.
While this is helpful in illustrating the value of the product, it also indicates how many claims were not paid, due either to the definition of the event not being met or to non-disclosure. A few years ago, these two factors resulted in around one in five claims being turned down on average: perhaps 8% might be refused as not meeting the policy definition and 12% for non-disclosure.
That, understandably, was highlighted by commentators and journalists and fears grew that customers could no longer trust insurers to pay out on claims. In some instances, journalists reported cases where a claim was turned down (often using a strict interpretation or applying the utmost good faith rule), when most people would see that as not justified and of "hiding behind the small print".
Insurers do pay out on valid claims, and pay out millions of pounds in claims every year. In 2016 the ABI and (group risk trade body) GRiD reported that some £1,190,740 was paid out on individual and group CI policies in 2015. That was 92.5% (17,854) of the 19,306 claims received. The average CI claim paid in 2015 was £61,677. The remaining 1,452 claims declined were due to the policy definition not being met, non-disclosure or fraud. Where a customer believes their claim has been turned down unfairly, they may complain to the insurer and, ultimately to the Financial Ombudsman Service (FOS). In 2015.16 the FOS received 747 complaints about (all aspects of) CI, down 6% on the year before. Complaints about CI made up considerably less than 1% of all the complaints the FOS received, although any complaint is regrettable and insurers need to be aware that any complaint can be damaging to the industry, especially if it is justified and the FOS finds in favour of the complainant. The FOS website includes details of complaints received including which organisations were most complained about.
In recent years, partly in response to concerns about unpaid claims, the industry and the ABI introduced various actions to reduce the non-paid figure. These included improved application forms and clearer messages on the importance of full disclosure plus revised Statements of Best Practice.
In March 2012, the Consumer Insurance (Disclosure and Representations) Act was passed. This came into effect on 6 April 2013 and changed the old concept of utmost good faith concept. The new Act is broadly in line with the ABI's 2008 guidance on disclosure and applies to all consumer insurance policies. Now, the law places a duty on insurers to ask customers all relevant questions - they can no longer rely on the customer having to disclose information to them, even if not asked for. In the event of non-disclosure, that is now classed in one of three ways:
- Innocent. Here the claim will simply be paid.
- Careless. The claim will be paid but the benefits may be reduced proportionately e.g., if a customer stated their age incorrectly because they had forgotten about a recent birthday the benefit paid could be reduced to that payable to someone of their actual age for that premium.
- Deliberate or reckless. The claim can be declined or the policy voided.
The law essentially follows recommendations made by the Law Commissions some years earlier although not all their recommendations were adopted or unaltered). Most commentators agree that the changes improve the law and are fairer to consumers.
The FOS sets out its approach to misrepresentation and non-disclosure at http://www.financial-ombudsman.org.uk/publications/technical_notes/misrepresentation-and-non-disclosure.htm.
For commercial insurances, the law has also recently been updated and the Insurance Act 2015 sets out a duty of fair presentation.
Trusts and assignments
It is often a good idea to write policy benefits in trust - in essence, a trust can ensure the right people receive the right money as quickly as possible. Where the policy includes life cover, a split trust arrangement is often chosen: the insured receives the policy monies in the event of suffering a critical illness while the insured's beneficiaries benefit if there is a claim on death.
A split trust effectively divides the policy's benefits into two categories - benefits payable on death and benefits payable on a critical illness. In this respect such trusts differ significantly from many life insurance trusts, where the insured is not able to be a beneficiary under the trust, as that would counter the trust's value as an inheritance tax planning tool.
Policies can be assigned, as with other types of life policy. If a policy is assigned, effectively the benefits then belong to the person or organisation that the policy is assigned to. Assignments may be formal or informal and, if used as security for a loan or mortgager, the policy would usually be reassigned back to its original owner(s) once the loan is repaid. A policy written in trust may however not be acceptable to a lender as, if a claim is made, the policy monies would be distributed in accordance with the trust's provisions rather than to the organisation or person who has been assigned the policy.
Many insurers produce draft trust documentation and guidance free of charge. Generally, such trusts work very well, providedthatthe customer's needs are relatively straightforward. If not, it may be necessary to take professional legal advice, which can be expensive.
Benefits are not subject to income taxes or capital gains tax. For group schemes, premiums paid (by the employer) are usually a taxable benefit for the employee, with no tax payable on the benefit where it is payable to the employee. However any premium paid by the employer will be a P11D benefit for the employee.
As noted above, when critical illness insurance is written as general insurance, premiums are subject to insurance premium tax. Tax rules can change at any time though and you are advised to take professional advice on your own tax situation.
Critical illness insurance which is pure protection is regulated by the Financial Conduct Authority (FCA) under the Insurance: New Conduct of Business Sourcebook (ICOBS). In some cases critical illness insurance is regulated under the stricter New Conduct of Business Sourcebook (COBS). This applies where there is any investment element (for example, the policy is unit linked or with profits or includes surrender values or the policy term is whole of life).
The industry also adopts its own codes and standards of practice. For example, the ABI's Statement of Best Practice for Critical Illness Insurance sets out a number of standards, which are mandatory for its members (the vast majority of UK insurers) and also have an influence on non-ABI member companies (e.g. the Financial Ombudsman Service is likely to expect non-members to adopt similar standards of practice).
Product developments and innovation
The critical illness insurance market has changed significantly since the product's introduction in the 1980s and the trend has been to cover more conditions over time. But innovation has been relatively slow and, by late 2016, few new ideas being talked about by insurers had actually made it to market.
The main trends over the past few years have been:
- In 2016 one insurer (Aviva) launched a CI cover option as part of its relevant life policy. Such policies come under pension scheme rules and one advantage is tax relief on premiums. However, the move was controversial, with some insurers believing such cover is not possible under RLP rules. You should follow any developments as they arise.
- Some insurers now offer a later life option on their CI policies. Typically, this pays out a cash lump sum if the customer is unable to care for themselves. As with conventional CI cover, the customer must meet the definition set out in the policy terms and conditions. The benefit may be in addition to the policy's normal sum insured and there may be a financial limit.
- Some years ago, many insurers withdrew guaranteed premium rates after major reinsurers pulled out of the market because of concerns over future claims trends. By early 2006 however, more reinsurers were prepared to offer such cover, although premium rates had risen by 50% or more and some conditions (such as angioplasty) were no longer covered. Some insurers now offer reviewable premium rates (usually reviewable after five or ten years, or more frequently at older ages), as well as guaranteed premium rates. Guaranteed rates remain very popular, even though rates can be considerably more expensive initially.
- Stricter underwriting criteria over the years had led to insurers lengthening their application forms (some run to over 40 pages) in order to identify higher risks and to be able to offer the lowest premiums to the majority of their customers. However, one unintended consequence was that this discouraged some people from buying CI cover at all. In response, many insurers now use adopted tele-underwriting or intelligent online underwriting, where questions can be tailored to the individual applicant's circumstances and so shorter application forms can be used. Tele underwriting has also helped reduce levels of non-disclosure.
- In 2006 Virgin Money introduced a policy underwritten by Scottish Widows that would pay out only on diagnosis of cancer. This cancer-only policy also provided different sums insured, depending on the severity of the cancer. However, the plan is no longer being marketed, although existing plans continued. In 2009, health cash plan BHSF introduced its Plan4Life, which pays out up to £24,000 on diagnosis of cancer. This policy is written as a general insurance contract, with premiums increasing with age and smokers getting half the benefit only.
- In 2006, PruProtect (a joint venture formed by Prudential in conjunction with South African insurer Discovery and now renamed VitalityLife) introduced a policy - since updated - that paid out on serious illnesses as well as critical conditions. By late 2016, over 170 illnesses and conditions were covered (although some are quite similar), with more than 100 conditions covered on a lower cost version of the plan too. The plans pay out different sums insured (5-100% of the insured benefit), depending on severity, and can pay out more than once if a condition returns. Other benefits are also built-in or optional and customers can earn Vitality points for taking positive lifestyle decisions such as joining a gym or giving up smoking. Although such plans may offer more benefits, they may cost more too (for the same overall sum insured) and can be more complex.
- A growing number of insurers now include access to third party added value solutions. For example, someone diagnosed with cancer can obtain information or speak to a nurse who can help explain treatment options, put them in touch with self-help groups and provide counselling sessions if required. Or, a claimant can have a medical second opinion from a recognised medical doctor about their condition and treatment options. Such benefits are hard to quantify financially, but can be invaluable to claimants and their families.
Despite such developments, insurers face a number of worrying issues:
- Medical developments, especially more screening and new genetic tests, could identify some conditions earlier and may lead to cures, even before the symptoms of a condition are apparent. In this event, should such conditions remain covered and if they are, might that make premiums unattractively high? (For more on this see Medical advances, below.)
- Great care is needed when underwriting in order to obtain reinsurance and to ensure that such reinsurance will pay out in the event of a claim. This has been compounded by a trend towards reinsurers taking more of each risk.
- Up to 25% or more of applications received are not accepted at standard rates. This can discourage customers from buying or advisers from recommending CI cover. The reason why fewer customers are now accepted at standard rates is the industry's focus on price. In order to offer the lowest premiums, an insurer must be careful to select only the best (i.e. lowest) risks. The situation has been compounded by the growth of portals that show, for each risk, the lowest premiums available in the market (or at least the lowest that portal has access to). Such price comparison sites naturally focus on price, although may also take into account other factors too.
- In the past, some insurers reported up to 20% of claims are rejected as a result of non-disclosure or of a definition not being met. Such high levels damaged insurers' reputations and actively discouraged some customers from buying and advisers from selling or recommending critical illness insurance. Various measures have been introduced to cut the number of rejected claims; most recently, ABI guidelines on non-disclosure (now effectively absorbed into law) and strong encouragement for all CI insurers to publish their claims stats (see Claims above). As a result, the number of claims not paid has halved, although is unlikely ever to drop to zero.
- Another issue is the "windfall" effect: should a policyholder be paid out even if a condition is not immediately life-threatening? One solution is to pay different benefit levels, based on the severity of the condition but, if insurers adopt different thresholds, a customer could be paid out nothing, a partial or the full sum insured, depending on whether their diagnosis met the policy definition.
- A growing concern is that critical illness cover is becoming too complex for potential customers (and even financial advisers) to fully understand. For example, most definitions include detailed medical terminology and run to one or more paragraphs which, multiplied by over 40 conditions, result in a considerable technical document to read. As definitions have to be legally and medically watertight, they include language and measurements that will not be widely understood outside the medical profession. Is this a necessary side effect of ensuring greater clarity, or is it a step too far? There is also no common agreement between the insurance and medical professions as to what should constitute an "insurable critical illness". If there were, potential customers would have the confidence of knowing that the medical profession and the industry were in broad agreement and that it was therefore not likely that the insurer had worded a definition in such a way as to seek to avoid paying claims. One partial solution is to offer a summary of what the full definition means to the layperson - but this runs the risk of missing out important information (any ambiguity will be construed against the insurer in the event of a dispute). Some have advocated a 'Quick start guide' approach, similar to that adopted by manufacturers of electronic equipment.
- Critical illness cover should be supplemental to life and income protection cover but consumers' limited budgets mean that the different products can be seen to be in competition. Which is most important? That is impossible to answer without knowing what that customer will or will not end up claiming for. Menu plans, which can include more than one type of cover, may be the solution, particularly if cover is extended over time and changed as the customer's needs change.
Some insurers want to offer more help to claimants, not just pay out a financial benefit, and others want to offer more holistic benefits including, say, an income on developing a long-term illness or becoming disabled. But resolving these issues may well involve greater complexity and result in a less attractive product for consumers.
One other factor regarding medical advances is that new therapies for conditions such as cancer can be very expensive and not all new drugs will become available through the NHS. As a result, some claimants may look to their CI cover to pay for treatment they cannot get free through the NHS or through their private medical insurance.
The value of CI cover may therefore become greater, as it can be used to 'top-up' NHS care and pay for drugs that may cost thousands or tens of thousands of pounds to buy and be administered (in some cases the actual cost of the drug may be around half the total treatment cost once the cost of administering the drug and the hospital's mark-up have been added).
Medical science is developing in a number of ways. For example:
- More testing to reveal treatable early-stage cancers could lead to people being diagnosed years before any symptoms develop.
- More sophisticated testing may show that more people have had heart attacks, although some of these may be asymptomatic.
- Improvements in genetic testing or lower cost access to confidential testing might allow some people to know they are at higher risk of suffering a particular critical condition.
In response, the industry is continually looking at how best to make its products "future-proof". One early solution was to raise premium rates (especially where rates were guaranteed) and/or to change definitions by making them stricter (for example for prostate cancer and heart attacks) or to remove certain conditions (for example angioplasty) - broadly to try to ensure benefits would continue to be paid to those individuals whose condition had reached a certain or critical level. However, such piecemeal changes in themselves did little to inspire confidence and trust in the industry.
Current thinking is that definitions should be as future-proof as possible, while recognising that further changes might be necessary in future and that the intention should always be to pay claims in the situations that the product designers originally intended. One downside of this is that definitions of what is and is not covered can get ever more complex and that in itself is likely to discourage customers from buying critical illness insurance. One partial solution is to use a good medical dictionary to better understand definitions, or to look up terms used on a reputable medical website.
Questions and answers
Q: Why is critical illness insurance needed if I already have life insurance?
A: Life insurance benefits your dependants (or business) if you die. Over 100 years ago many of today's critical illnesses were invariably fatal, so the main need was to have life insurance. Now, many critical illnesses are survivable, while medical science can effectively not only treat many previously fatal conditions but also allow the patient to enjoy a high quality of life. If, however, they lose their job as a result of their illness, or decide to move to a less demanding occupation, or have to pay some of their treatment or related costs themselves, the financial effects can be significant. Critical illness insurance pays a cash lump sum that allows the claimant to spend it in whatever way they see fit, providing considerable peace of mind and flexibility.
Q: My doctor will not pay for a particular cancer drug as NICE (the National Institute for Health and Care Excellence) says it is not cost effective. Could I use the pay-out from a critical illness policy to pay for the drug?
A: Provided the drug is properly licensed, yes. In fact the benefit payable can be used for any purpose, provided that the policy is not assigned (for example, to a lender).
Q: Is critical illness insurance more expensive than equivalent life insurance?
A: Yes, for most working people, the risk of suffering a critical illness in the next year is more than three times the risk of dying. This is reflected in the premium payable.
Q: Should I take out critical illness insurance to cover my mortgage?
A:For many people, their mortgage is their largest regular financial commitment. Suffering a critical illness can be a life-changing event and many people fear they may be unable to pay their mortgage if they suffer a critical illness. The alternative of the State welfare benefit system typically only kicks in after 39 weeks off work and may not cover all (or any) of the mortgage interest payable. Even where it does, it will not pay off any of the outstanding mortgage capital. A critical illness insurance policy can be used to pay off a mortgage or used for any other purpose such as home alterations (if you become disabled), a once-in-a-lifetime holiday or to set up a business or other career change.
Q: Is critical illness insurance an alternative to income protection insurance?
A: No. A critical illness insurance policy pays a lump sum on diagnosis of a medical condition that meet a very specific policy definition. For example, although "cancer" is covered, a skin cancer that has not spread to other organs may not be covered or may pay out a much lower benefit if this is an additional or partial benefit. An income protection policy covers a much wider range of conditions (including conditions such as stress and musculoskeletal problems, which account for much long-term sickness absence) and may pay a regular income for a fixed period or until retirement. Income protection policies only pay out if the individual is unable to work or carry on his or her full normal (or in some cases any) occupation because of illness or disability. In some cases (for example, someone who is not working), an income protection policy will pay benefit if the individual is unable to carry out a number of activities of daily working. Generally, people should consider both types of policy carefully before deciding to have one or the other, or both.
- Critical illness insurance was first developed in South Africa in the early 1980s.
- It was introduced into the UK in 1985.
- As many as a million new policies a year have been sold in the UK, according to the ABI, although since peaking in 2003 numbers fell to half that level in 2015.
- Over £2.5bn in claims has been paid out since 2000, the ABI estimates. Over £1 billion was paid out on individual and group CI claims in 2015.
- Critical illness insurance is more expensive than an equivalent life assurance policy as the chances of claiming in any year are significantly greater.
- Policies are usually written on the life of a single individual or on a joint-life first-event basis (with the sum insured payable if either life insured is diagnosed with a critical illness).
- On payment of the sum insured the policy usually comes to an end. Exceptions to this are for children's benefits or where a buyback option is included. Severity based cover may also mean cover continuing after a claim or claims have been made (if a partial or additional benefit).
- Unlike life insurance, critical illness insurance has a great appeal to single people and those without dependants as they get the financial benefit if they make a claim.
- The main use of critical illness insurance is to protect a mortgage.
- The latest ABI statement of practice for Critical Illness Insurance was launched in20141 to help future-proof policies and to ensure that customers understand exactly what the policy covers and what they can claim for.
Further information and references
The critical illness insurance market, and new policies, are regularly reviewed in the insurance and financial services trade press and online news and other services.
Many insurers include comprehensive technical information about their policies in their customer literature and in technical guides for intermediaries. This includes medical and "plain English" definitions of the conditions covered.