CIExpert director on how to navigate the children's critical illness minefield
In recent years a number of insurers have refined their critical illness plans so that children's cover is optional.
Guardian has gone a stage further and allowed a choice of sum insured between £10,000 and £100,000. There is a clear logic to this approach inasmuch as those clients without eligible children have been subsidising those with children. As a result, the cost of children's cover had been suppressed because there was no danger of anti-selection.
Simultaneously there has been a concerted move by most quality insurers to cover children from birth and also to extend cover by including child-specific conditions such as Down's syndrome, craniosynostosis and osteogenesis imperfecta.
This added flexibility and wider coverage has consequences as it raises a number of potential compliance concerns for advisers and provides a dilemma for some clients.
When advising a young couple regarding their protection needs the logical aim is to provide the widest breadth of cover within the available budget and naturally this extends to assessing the competing child cover options. However, what should advisers do if the couple does not currently have any children?
There are two potential methodologies - the first is to suggest that as they do not currently have children they should exclude child cover until the appropriate time. The second is to recommend that they should include child cover from outset if they are definitely planning to start a family.
Let's look at this in greater detail; the advantage of waiting is that the cost will be lower thereby providing a saving. A non-smoking couple both age 25 taking a £150,000 repayment mortgage over 30 years would pay £41.04 for a no-child cover plan and £0.86 pm more with basic child cover included. Therefore, if they waited five years before starting a family, they will have saved £51.60.
However, pursuing this route places a reliance on the clients to remember that child cover isn't included and to alert the adviser when she falls pregnant. However, in the real world that is unlikely to happen. Flagging this with the adviser is unlikely to be at the forefront of their minds at this stage.
It is far more likely that they will be prompted to contact the adviser after the birth of the child but at this point the valuable child specific conditions will no longer be available and nor will the host of pregnancy complication conditions that some insurers now include.
Some compliance experts have suggested that not including child cover is the safest course of action as they have concerns that the Financial Ombudsman Service might consider that a policy for a childless couple which includes optional child cover constitutes a mis-sale, due to unnecessary extra cost.
Nevertheless, not covering children pre-birth severely weakens the value of the child cover as shown within Tables 1 & 2. Table 1 pinpoints the conditions likely to create a claim within the first year of life and Table 2 highlights the loss in the first and subsequent years. This loss also extends to those plans that do not cover children from birth.
Advisers either need to have an in-depth discussion with their currently childless couples or maybe simply recommend a company which does not offer options but automatically covers children.
This is an instance where fear that the regulatory tail is wagging the dog may prove to be of disservice to consumers.
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