Critical Illness Insurance (CIC)
Background to critical illness insurance
- When the first critical illness policies came onto the market, the differences between providers were extremely marked, with some policies covering a number of conditions while others relatively few.
- Consistency was improved with the introduction of an ABI statement of best practice including, among other things, a standardised set of definitions for ‘core conditions’ that all policies should cover. The ABI Statement of Best Practice on Critical Illness best practice sets out:
- A common format for the way CIC is described to potential buyers at the point of purchase
- The use of common generic terms
- The use of model wordings for critical illness and exclusions that meet appropriate minimum standards
Policy types and uses
- These policies can be guaranteed or reviewable, often written as a unit-linked plan.
- Because of the much higher risk to the life office, premiums are higher than those for basic life cover and underwriting may be stricter.
- A critical illness policy can be added to a life policy, which means an accelerated death payment can be made during the life as an alternative, not in addition, to the death sum assured.
- A few offices have policies that pay regular instalments of capital rather than a lump sum (similar to a family income bond). This is often cheaper than a lump sum contract.
Policy options and variations
- There are five possible definitions for total and permanent disability:
- Unable to do one’s own occupation ever again
- Unable to do a suited occupation ever again
- Unable to do any occupation ever again
- Unable to do 3 specified work tasks ever again. These are: walking, climbing, lifting, bending, getting in and out of a car, writing.
- Unable to look after one-self again. This is defined as failure to do 3 of: washing, getting dressed and undressed, feeding oneself, maintaining personal hygiene, getting between rooms, getting in and out of bed.
- Survival period — CIC is designed to pay out on the diagnosis and survival of a critical illness. Unless attached to life cover, the condition resulting in the immediate death of the insured (e.g. a heart attack) will not result in the policy paying out.
- Where a policy is attached to life cover and a CIC pay out is made, there will not be a further payment on subsequent death.
- Total and permanent disability — This is effectively a catch-all for a condition where, although not specifically covered by the policy conditions, the standard of the insured’s life is so poor that they are unable to ever live a `normal life’ again.
- Life cover buy-back options allow for a restricted from of life cover to be taken out without the need for further medical underwriting.
Conditions covered and excluded
- Each policy will specify exactly what illnesses are covered.
- There is a trend towards giving increasingly wide cover, led by newer entrants into this market.
- A few offices have a menu-style contract that enables clients to choose from a list of conditions for which they would like cover.
Premiums and underwriting
- Critical illness underwriting is based on the morbidity risks relating to the illnesses covered.
- Once a policy is issued, its illness definition will continue for the life of that policy.
- The most important factors for the underwriter are: age, medical history of the life assured, medical history of the life assured’s family, and lifestyle factors such as smoking and alcohol consumption.
- Since Dec 2012, men and women pay the same on individual policies.
- The policy pays out a lump sum when a critical illness is diagnosed.
- Terminal illness is not usually paid out in the last 18 months of a policy.
- The onus is on the policyholder to prove the claim. The appropriate medical evidence will be required and, depending on the policy terms, may be at the policyholder’s expense.
- Where there is no life cover, most offices require the life assured to survive diagnosis by, say, 14, 28 or 30 days before the claim is payable.
- Cover will cease on leaving service with the employer or retirement.
- Benefits are paid tax-free.
- The employee is liable to benefit-in-kind tax if the employer pays the premiums.
- There is no income tax liability on payment of the sum assured.
- Policies are not subject to capital gains tax.
- IPI covers significantly more conditions than CIC – notably mental illnesses and conditions that can debilitate an individual (eg back trouble) without being considered a ‘serious’ illness under a CIC policy. On that basis, IPI is likely to be a higher priority than CIC.
- It is important to ensure that CIC is appropriate for the risk to be insured rather than, for instance, IPI.
- It may also be relevant to look at the claim-paying history of the insurer in question.
- Medical developments are having a serious impact on CIC rates and product design.
- Under severity-based cover, a proportion of the sum insured is paid out on diagnosis, but as the illness progresses further proportionate claims can be made.
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