Endowment holders with a critical illness rider will be able to have their cover upgraded if their p...
Endowment holders with a critical illness rider will be able to have their cover upgraded if their provider has improved its plan since the policy was purchased, after a change in tax rules.
Under Inland Revenue regulations, if an insurer makes a significant variation to a qualifying product, its tax-free status may be affected on maturity and this has in the past prevented critical illness insurers passing on improvements to existing customers.
However, after much lobbying by the ABI, the addition or revision of illnesses will no longer be viewed as significant variations as long as the premium is not increased.
Nick Kirwan, product development manager at Pegasus, said: "This opens the way for providers to upgrade cover for existing customers to the standards offered in policies sold today.
"In the past, if a life office wanted to add a new illness to its CI policy the Inland Revenue would regard it as a significant variation and it would potentially have adverse consequences on the tax liability.
"It is important that CI policies are kept up to date. Until now, to keep cover comprehensive, people would have had to cash in the policy and re-buy it, but if their health had deteriorated some people would not have been able to do this," Kirwan said.
Problems could also arise when people increased their CI cover as this would have often been done by arranging a second smaller policy.
"A policyholder could have been in a situation where they had two policies from one provider where one policy would pay out and the other would not," he said.
Over the past five to 10 years the CI market has seen much product development. In 1991 many plans only had 13 conditions covered, but the best plans on the market today have approaching 30 conditions .
In particular, conditions such as Alzheimer's disease and Parkinson's disease are now a more common feature on CI plans than they were five years ago.
While policies are not seeing the rate of change they were, with the list of conditions now relatively stable, insurers cannot rule out the need to change plans again.
Kirwan said: "Medical science is always moving on and new techniques will replace older techniques which means cover will, at times, have to change."
The problem surrounding updating cover came to light after the launch of the ABI Statement of Best Practice.
Kenny Brogan, product manager at Standard Life, said: "The Statement of Best Practice resulted in virtually every insurer reviewing its range of conditions, whether it meant adding illnesses or changing the definitions."
The industry has been lobbying the Inland Revenue over the issue ever since. But Brogan said the rule relaxation does not go far enough where permanent total disability (PTD) benefits are concerned.
"PTD always tended to be offered on an any occupation basis to age 60, but since launching we have changed this to own occupation up to age 65. But because it was not standardised in the Statement, it cannot be revised retrospectively," he said.
Insurers have been advised that if they are to upgrade cover it should be done sooner rather than later, as to comply the policy must be amended prior to claim.
It is expected that insurers will write to all their customers to get signed authorisation before policies are able to be upgraded.
