Forward thinking

Betting each way reduces the odds. However, if we could gamble on two outcomes instead of one where the odds were the same ' would we? Double the chances of winning without reducing the win itself? Of course we would. Combined life and critical illness (CI) policies have become very popular in recent years as in most circumstances they offer the best of both worlds ' cash if you get ill or cash if you die.

However, interest in this area was heightened when the Office of Fair Trading expressed concerns that 'accelerated' benefit policies, or first event if you prefer, could leave the client exposed without life cover in the event of a serious illness at a time when the client would be very difficult to insure.

A clear need

The need for CI cover is clear ' living costs a lot more than dying. Generally speaking the buy-back option applies to combined life and CI plans where life cover, and in some circumstances also the CI cover, can be reinstated following a CI claim.

While noting that providers vary a little on this option, typically clients who have claimed under the CI part of the policy can buy-back their life cover should they survive a further 12 months. The reinstated cover is free of underwriting, however, the sum assured and term are limited to that of the original plan and any previous waiver benefits are forfeited on the new plan.

Premiums are not due during the 12-month waiting period and the new reinstated premium is based upon the new level of cover at the client's age at the time. However, while there is no underwriting crucially required, the option is unlikely to have been offered to anyone not originally accepted at ordinary rates.

So is it likely we will see more insurers offering buy-backs on their CI products in the future?

One would expect so as this is a growing area, although the recent uncertainty in the CI market could further lead to increased costs and restricted options in the near future.

While providers continue to explore other avenues in light of recent market changes ultimately it is the reassurers who hold the balance of power. However, it is both interesting and reassuring to see that during the current time of uncertainty, some providers are still looking to improve their product where possible.

Skandia Life states that one third of all its CI policies sold now include a buy-back option ' and it also expects this ratio to increase.

Gaining popularity?

The option is gradually becoming more popular with independent financial advisers (IFAs), however, there has been a slow response from most of the direct/discount providers. This is perhaps explained by the potentially time-consuming nature of quoting. Direct comparisons for buy-back options are not yet instantly available as they are with the waiver of premium option, for example.

The IFA is rewarded, however, with greater commission on the first policy ' as the premium is higher ' and also a second helping of commission should the buy-back option subsequently be taken out as a new policy is set up.

Potentially all clients could benefit from a buy-back option, however, if the need for cover is limited to that of the mortgage or business, for example, then usually just one pay-out is required and the buy-back option is not suitable.

However, there is a valid argument for solving the problem comprehensively from outset and writing separate or 'additional' benefits from day one. Life cover should almost always be included for two very good reasons:

n CI cover can often be cheaper when life cover is included.

n Should the client suffer a critical illness and pass away during this period CI cover does not pay out ' this becomes a death claim. If life cover is included this issue is removed.

A further issue of vital importance is the Inland Revenue's stance on writing buy-back policies under trust so they can be treated as a gift with reservation ' even with the use of a split/carve out trust ' as the life assured retains an interest in the policy after the initial claim.

Providers currently vary on this with some advising they are happy to accept buy-back policies in trust while some refuse carte blanche. Therefore, depending on the provider it is possible that buy-back policies cannot effectively be written into trust. However, the subsequent re-instated policy could be written under trust as normal at the time.

So, do buybacks really offer value for money? As this is a very recent development it is too early to study claims history, however, consider the scenario of a client you sold CI cover to three years ago, who walks into your office looking for life cover following last year's heart attack - the options here would of course be very limited ranging from a heavy loading to a likely postponement.

The need for additional benefits is clear. The question is how best to achieve them.

While the cost of buy-back options is on average relatively small, given the trust position, the more comprehensive advice is often to recommend two separate policies from outset ' one as life with CI cover, with a second life-only policy.

Here, should the client pass away' both life cover elements would pay out, or should the client suffer a critical illness and subsequently pass away, again both policies would pay out, and crucially, be written in trust.

Kevin Carr is senior technical adviser at LifeSearch