Advances in medical science mean that people are increasingly surviving critical illnesses. Proof is...
Advances in medical science mean that people are increasingly surviving critical illnesses. Proof is all around us that that life goes on after a critical illness, with survival rates improving all the time. But what does this mean for financial planning?
One implication is the need to plan ahead, not just for the day critical illness strikes, but for life beyond critical illness. A financial plan that stops on the day illness begins ignores the living proof of all the people who have survived a critical illness to live life to the full. To help people plan beyond a critical illness, it is important to think about what their financial needs, fears and aspirations might be.
Fearing the future
Ask anyone who has had a heart attack what they fear the most. The chances are it is having another heart attack. The same applies to victims of cancer and strokes. Sadly, this fear is well founded because these illnesses can, and often do, strike again. The first five years are usually the most vulnerable. This is why most people are uninsurable after a critical illness and likely to remain so for quite some time.
When someone has critical illness, the payment of a lump sum can make a huge difference to their quality of life. However, when people actually get their payout, what they do with it is not always what you would expect. All too often, people are scared of spending the money even on things that would help them get better. After a heart attack, for example, the best thing is often complete rest and relaxation. What could be better than soaking up the sunshine on a cruise, away from all the stresses of everyday life? And yet many people are frightened to spend even a part of their pay-out on such a thing.
If you put yourself in their shoes, this is entirely justified. First, those who have just had a critical illness are often dependent on the very people who used to depend on them and so they feel vulnerable. Then there is the concern that they may never work again, bringing fears that this maybe the last lump sum they may ever receive. To top it off their illness may return, although this time there will be no cash payout.
Buy-back cover
There are two types of 'buy-back' now available on the market that can help provide cover and peace of mind. These are critical illness cover buy-back and life cover buy-back. The two are not to be confused because they provide different benefits and work in a different way.
Critical illness cover buy-back works like this:
l The customer buys a critical illness policy (with or without life cover) and chooses the critical illness buy-back option for a small extra premium.
l If the customer has a critical illness, a year after the illness they can take out a new critical illness policy.
l The new policy will cover at least the 'big three' illnesses heart attack, cancer and stroke, even if the policyholder has already suffered one of these diseases.
The most important replacement cover is for the big three, for two important reasons. First, these account for the vast majority of claims. Second, and more importantly, of all the illnesses covered in the initial plan, not many happen twice such as multiple sclerosis, blindness, deafness, PTD or Parkinson's disease. However, it is entirely possible for a heart attack, cancer or a stroke to reoccur all of which would be covered.
An important consideration is the cost of the replacement cover when the customer takes it up. This is important because a number of these people will not be working following their initial critical illness and it is vitally important that they are not prevented from taking up the cover they need because they can not afford it. So replacement cover should only cost a nominal amount regardless of the customer's age and health at the time.
IFAs with clients that have had a critical illness will know how much these people want critical illness cover. You may even have tried in vain to help them get cover and will know only too well how much comfort it would give your clients to know that the financial side of things is taken care of.
The concept of life cover buy-back was imported to the UK from Australia where it has been sold for a number of years. In outline, it works as follows:
l The customer chooses a plan which pays out on the earlier of critical illness or death and includes life cover buy-back for an extra premium.
l If the customer has a critical illness, after a set period, typically a year, the customer can buy back their life cover at normal rates without giving any medical evidence.
Like critical illness buy-back, life cover buy-back can give the customer extra peace of mind after a critical illness claim. They know their dependants will be financially secure at a time when they are probably uninsurable. However, unlike critical illness cover buy-back, having life cover continue beyond a critical illness can be arranged in other ways. An alternative is to buy two separate policies one for life cover (usually with a waiver) and separate critical illness cover. This has several important advantages:
l After the critical illness claim, the life cover remains intact.
l There is no break in cover during the period before the customer gets the replacement life cover this is often the period when the risk of death is greatest.
l If the life cover plan includes waiver, and the critical illness prevents the customer from working, the life cover premiums will be waived. With life cover buy-back, even though the cover will be at standard rates, this may be expensive because the client will be older and may have no income.
l The critical illness plan can include critical illness cover buy-back, giving the customer the best of both worlds continuing life cover and replacement critical illness cover.
While two separate policies are therefore a better solution in most cases, it can also be more expensive. This is an area where expert advice from an IFA is essential.
Benefits to business
It is not only individuals who need buy-backs; businesses can benefit too. The need for businesses to include critical illness cover as well as life cover for key employee cover is now almost universally accepted. Usually businesses have time to plan for a key employee's retirement and the effect this will have. However, there is no time for planning if the employee dies suddenly, or has a critical illness and this can have serious financial consequences. That is why planning beforehand to get a lump sum is essential.
However, as with personal protection, key employees will usually survive a critical illness. This means that the financial plans for the business also need to look beyond a critical illness. After a key employee is critically ill, one of two scenarios will usually happen. Either the key employee returns to work or they take early retirement.
If the key employee has a heart attack and returns to work after a number of months, the initial payout covers the intervening period such as consultants' fees, drop in turnover and so on. When the employee returns to work and needs to be insured again, the business can use buy-back to purchase more cover. If this was included from the start, the business simply takes up the option.
Alternatively if the key employee has a heart attack and decides to retire, the payout will help the business until the key employee is replaced. In this situation the business can assign the buy-back option to the key employee. The key employee needs the cover especially critical illness cover on a personal basis as never before. As there is a year break in the cover, this can be in the tax year after the key employee has retired which could help to ensure there is no tax to pay.
So it is a win-win situation. If the key employee returns to work, buy-back protects the business. If the key employee retires, buy-back protects the key employee. When someone retires early after a critical illness, a critical illness policy makes a fantastic retirement present.
Nick Kirwan is manager of product development at Pegasus
