Deepak Jobanputra examines the question of 100% payouts in severe illness cover, and finds this isn't necessarily to the client's benefit
We all know that a death isn’t the only threat to finances. Severe illnesses can have a devastating impact on them, yet sales of critical illness and serious illness cover still lag behind life-only term assurance sales.
In 2014, there were 832,935 new life-only term assurance policies compared with only 446,513 term and critical illness and 18,208 standalone serious illness cover policies (1).
Given that you are much more likely to suffer from cancer, a stroke or a heart attack before the age of 65, taking out critical/serious illness cover should be high on your recommendation to clients.
Not only that, but the way we experience illnesses has changed and people are living longer now than ever before. Medical advances have meant they are diagnosed earlier, treated better, and as a result survival rates are improving.
For example, cancer survival rates have doubled in the last 40 years (2). So now, illnesses previously viewed as critical can actually have less of an impact on our day-to-day lives.
However, because more people are surviving critical illnesses, they are now facing a greater number of serious illnesses, those that aren’t as life-threatening, but still have a significant impact on the way we live our lives.
Therefore, the needs of your clients have changed. Is traditional critical illness cover still the ideal solution for financially protecting against illness?
The problems with 100% payouts
Typically, critical illness cover gives clients a one-off 100% lump sum payment for conditions covered on the policy. In most cases, following a claim, their cover comes to an end. However, there are problems with this:
• Once a client has made a claim and their existing cover comes to an end, if they wanted to keep a level of financial protection they would need to take out a new policy and be fully underwritten again. This time with critical illness on their medical records.
The unfortunate reality is that 49% of people who have one chronic condition go on to suffer from further illnesses. And if they had already received their full payout, they wouldn’t have access to any more financial protection.
Most will find that they are unable to get cover, and even if they can, there will be very restrictive exclusions and expensive loadings applied.
Although it’s easy to think that only very unlucky clients would have to claim more than once, research shows that the number of people suffering three or more long-term conditions is expected to increase by 50% in the ten years from 2008 to 2018 (3).
• The recovery times for some critical illnesses can be fairly short, and in these cases your client may have been able to return to work in a relatively short amount of time.
Yet, with a typical critical illness policy, they probably will have received a 100% payout when it may not necessarily have been needed.
It could be easy, in such a situation, for them to see the money as a windfall and spend it on luxuries such as buying a larger house, a new car or a family holiday.
However, the unfortunate reality is that 49% of people who have one chronic condition go on to suffer from further illnesses (4). And if they had already received their full payout, they wouldn’t have access to any more financial protection.
There are alternative protection products available, where the amount your client receives is based on how severe their illness is and the effect it has on their lifestyle. That way, they receive the money when it’s truly needed.
And your client also has the added assurance that they have continuous cover: if the payout isn’t 100% of their sum assured, they still have any remaining cover in place should their condition worsen or they be diagnosed with a new illness.
British Friendly has introduced an online Adviser Toolkit to encourage income protection sales.
Zurich has launched a 'selfie' app called FaceQuote which estimates how much life cover someone might need.
The official supplement of this year's COVER Excellence Awards is available to read now as an eBook.
Child cover within critical illness plans has assumed a far greater importance in recent years, writes CIExpert's Alan Lakey.