Although critical illness plans are popular among younger clients, Dr Andrew MacLellan explains why it is vital that older clients also have adequate protection
What if something goes wrong with your client's health once they reach 50? If they are still working they may have an income protection scheme so that most of their lost monthly income could be replaced.
These plans are useful as they often insure against musculo-skeletal and mental disorders. Or worse, they might have to retire early on the grounds of ill health, but on a smaller pension than they had planned for. Further planning would be to take out a critical illness (CI) policy, which would pay out a lump sum if they were diagnosed with one of a number of diseases.
Protecting savings
So why would a client in this age group need a lump sum? The most obvious reason for taking out CI cover may be to repay a mortgage. But this is not the only reason. Others may include ensuring that they could still plan their finances even if their health got worse, such as continuing to pay for their children's education, providing for their spouse and perhaps elderly parents. It may also mean they can still go on the travels they had always planned for in retirement, or are able to afford medical treatment either in the UK or abroad. Or it could enable them to afford to buy or sell agreements that relate to their own business or partnership, supplementing their pension and protecting the savings and investments that they had built up during their life.
One of the people responsible for our high life expectancy was Dr Christiaan Barnard, who demonstrated that people could survive a previously fatal condition. However, especially in the early days, the patient was left in a very weak state with a long recovery period. It was during this period that financial responsibilities became unmanageable, as the patient may not have been able to work again. It is widely accepted that it was Christiaan's younger brother, Dr Marius Barnard, who was the first to introduce a solution to the problem by proposing CI cover in South Africa in 1983. By 1986 the first version of this insurance reached the UK.
Initially the purpose of CI cover was clear to both insurer and patient. But, and it is very important to be aware of this when discussing CI cover, the goal posts have and are continuing to change. Treatments and investigations of the human body have become more focused and less traumatic. The overall result often means that what was critical five or 10 years ago could be much less so today.
Assessment
Can you quantify the risk of suffering a critical illness when you are over 50? Astrological methods have been proposed in a recent book devoted to this subject. A less controversial approach is to look at the statistics by sex and age.
Table 1 was derived from National Statistics Online data for those registered as suffering from sickness and/or disability. The figures do not directly indicate the incidence of critical illness rather they show how the health of men and women changes over their adult life.
As expected, health dramatically declines in the older cohorts. But the unexpected findings were in the samples for females in the 55 to 59 cohort and for the males in the 60 to 64 cohort, which is in the five-year period before each typically would retire. Both show a significant rise in illness. Does this indicate an increasing level of stress and illness in the run up to retirement?
It is made more pronounced because the incidence of sickness and disability declines almost as abruptly as it rose in the older group just following retirement. If this data also reflects the likelihood of suffering a critical illness then it follows that insuring oneself at the comparatively late age of 50 would be a sensible precaution.
CI applications are assessed with much more thoroughness than those for life assurance, as the likelihood of claiming increases with age. At the age of 50 the medical assessment is similar to that for the younger age groups. But subtle changes start to become apparent as you reach your 60s and beyond. A high body mass index may not represent the same risk as with younger applicants.
The body's metabolism changes with age, for instance it becomes less able to metabolise alcohol. Lipid measurements, such as for cholesterol, may have less of an influence after the age of 60. Even family history may be less important.
The right plan
When choosing a CI plan for clients over 50-years old, your checklist should consider the following:
• If they have children under the age of 18 then check that the insurer will include some CI cover for them at no extra cost.
• If the sum required is modest then they may fall below the threshold for additional medical questions or examinations.
• If the sum required exceeds £500,000 then financial questionnaires may be required as well. For large sums, say over £2 million, check that the insurer will be prepared to consider their application.
• Choosing between contracts issued by members of the Association of British Insurers makes comparing between medical conditions covered and exclusions much easier.
• Check the survival period after diagnosis, preferably no longer than 14 days.
• Check the insurer offers the term required.
• If they need cover for a fixed term then a guaranteed premium may be affordable.
• Although costs may increase with age it may still be worth accepting an initially cheaper reviewable contract.
• If they need the plan for their entire lifetime then a whole of life contract or even a rolling term contract may suffice.
The addition of life assurance to your client's CI contract has several advantages. It should include terminal illness (TI) cover, so that in the event of them being diagnosed as likely to die within 12 months, then the full sum assured will be paid even if they were not diagnosed with a critical illness.
The other advantage is that the survival period is usually ignored and a payment can be made soon after diagnosis. Otherwise, without life assurance, if your client were to die within the contract's stated survival period, for example 14 days, then no payment would be made. The life assurance could be placed in trust to their beneficiaries. Ensure that the CI and TI benefits are excluded from the trust so that these payments could still be made directly to your client. It is therefore essential to discuss all aspects of cover with older clients.
Dr Andrew MacLellan is an IFA at Inter-Alliance Group plc's City of London office
COVER notes
• A CI lump sum payout can be useful for older clients as they are likely to have heavy financial commitments.
• Statistics show people have a much higher chance of suffering serious in the five years before they retire.
