Critical Illness Cover: Insurance benefit or windfall?

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Mari-Lizette Malherbe asks has critical illness become a windfall benefit?

The purpose of insurance is to cover the cost of an unexpected event which would otherwise cause a financial short-term strain on an individual or jeopardise their future financial position.

The question therefore arises does an individual suffer a financial loss when diagnosed with a critical illness in a country where medical care is free at point of delivery and there is state support for the long term sick?

With ever more conditions being added to the product to ensure it remains attractive to advisers and customers, has critical illness become a windfall benefit?

Is there a financial need for those suffering a severe critical illness?

Let's consider the top cause of claim, cancer.

A research report by MacMillan confirms that an individual diagnosed with cancer will suffer a financial loss due to the combination of a smaller income and increased costs during and even after treatment.

Many cancer patients experience a reduced ability to work due to the physical and psychological toll of the disease.

Increased costs include transportation to treatment, rehabilitation costs and greater household costs, such as higher energy bills and assistance with household chores.

In the UK there are state benefits available to the long term sick but these often don't cover everything. For example, the NHS offers rehabilitation support to help those who have undergone cancer treatment to return home but not the additional rehabilitation often needed to return to work. A critical illness benefit payout could be used to fund this.

For progressive diseases like motor neurone disease, the financial loss upon diagnosis is usually limited. The financial strain will increase however as the disease progresses due to a reduced ability to work and an increased need for care. A critical illness benefit allows those diagnosed with a disease like this to plan for the financial impact in advance.

It is clear that those suffering from a severe critical illness are protected from financial hardship with a benefit payout. Ultimately the benefit levels required will be determined by an individual's circumstances, such as their sick pay entitlement, proximity to treatment providers and family setup.

Are the less severe conditions unjustified?

On the other end of the spectrum are the less severe conditions that attract a partial payment. The inclusion of these is often questioned since the impact on earnings and future quality of life may be negligible. But does this mean that a payment is not warranted? Let's look at angioplasty as an example.

Angioplasty is a minimally invasive procedure which requires just a few days off work after the surgery for those in sedentary occupations.

The prognosis of those who undergo the surgery is good, with no need for rehabilitation and no costly lifestyle changes.

In saying this, many will suffer a loss of income in the months leading up to the procedure since the underlying heart condition will impede their ability to work.

The treatment for conditions like carcinoma in situ of the breast and low grade prostate cancer is more invasive and can be traumatic both physically and psychologically.

It will also require some short-term absence from work and lead to increased costs similar to those for severe cancers, albeit for a shorter period.

Hence, despite the long term impact usually being negligible there is still a financial impact to an individual, so the reduced benefit payable on suffering such conditions is by no means a windfall.

Does this mean the product in its current format is ideal?

As concluded above, by evaluating all of the conditions typically covered by critical illness products it becomes clear that they will lead to a financial strain which warrants a benefit payout.

Having said that, it does not follow that the product in its current format is the best solution for all. Nor does it mean that adding more conditions which meet the requirement of causing a financial strain is necessarily the right way forward.

Arguably the complexity of the product can act as a barrier to sales and of course affordability plays a role in any purchase.

For many, cover for the most likely and severe conditions, such as advanced cancers and severe heart attacks, at a reasonable price is a better option than comprehensive but expensive cover which can be complicated and difficult to understand or worse still, no cover at all.

Whatever the product, education also remains key to re-emphasise the purpose and benefits of critical illness cover.

Clearly critical illness products do not simply provide a windfall benefit but address a real need. The time is ripe for the industry to decide whether they will continue down the route of adding ever more conditions in an attempt to attract advisers and consumers.

By taking a hard look at the product and how it is perceived we can ensure that it remains both affordable and attractive to a wide cross-section of customers.

Mari-Lizette Malherbe is a pricing actuary at Munich Re 

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