Serious illness policies
Serious illness policies were developed in South Africa in the early 1980’s. These early products paid out a sum assured on the diagnosis of a listed illness - usually heart attack, coronary artery bypass surgery, strokes and cancer.
A serious illness policy pays a cash lump sum should the person insured develop one of the specified illnesses within the term of the policy. You can purchase these types of policy on their own, in conjunction with Life Insurance or mortgage protection.
Canada Life were first to market this new type of policy in Ireland back in 1987, other life offices followed. Each office adding ‘more life threatening illness definitions’ to give them a competitive advantage.
However, things started to get carried away by around 1993 when due to competitive forces life, offices started adding even more illnesses to their list of about 15, until quite recently some started to cover over 40 conditions. Some in the industry felt that some of the illness definitions were becoming a little obscure, and this coupled with a lack of consumer understanding especially regarding their interpretation of a ‘serious illness’ was putting the insurance industry into deep water, leading to an increasing number of claims being rejected.
Comparing market leaders one can note that some companies would pay out on any of over 40 conditions, whilst others may cover less than a dozen. A consumer making a purchasing decision would probably choose the product which covers the greatest range of illnesses. But think again. Informed opinions are better than hasty judgments.
The attraction of a ‘Serious illness’ policy is that it offers protection against a list of illnesses. The longer the list the more appeal especially to risk averse persons who in general, view the event as much more likely to occur than it actually is – quite naturally they would probably go for the policy that covered the greatest range of illnesses.
For a valid serious illness claim, the insured must develop the serious illness as defined in the policy conditions. But beware because typical policy descriptions like heart attack does not mean it covers angina. Transient ischemic attacks (TIAs) are not strokes. Non invasive cancer is not cancer. A vast number of serious illness sufferers actually die from their disease and typically most policies stipulate that you must survive for 14 days after diagnosis of the illness for it to be considered a valid claim.
- The extreme severity of some of the illness covered by the policy definition would make a claim almost impossible.
- In some cases it is highly unlikely that a person may be able to claim. Some conditions are hereditary. For example, a person may not be able to obtain insurance against a specific medical condition in the knowledge that he/she was predisposed to develop that condition without showing that information to the insurer.
- Some of the conditions covered have such a low likelihood of a claim occurring given the low incidence of that condition in the population in general. (see attached file on epidemiology)
The product should focus on covering those diseases, which have a major impact on lifestyle. One company, (Irish Life) has moved towards this by offering 26! In my opinion they may not offer the longest list, but the illnesses they do cover are less misleading and surely that’s a step in the right direction.
Of all serious illness payouts made to date, we cannot ascertain how many claimants are alive 1, 5 or 10 years later. Did these claims go on to become death claims within a short period of time? That is certainly food for thought and one can only hope that in addition, many of these claimants had adequate (and cheaper) Life Insurance in place?
There has been a move towards trying to remove the mystique of such policies by presenting the actual policy terms and conditions and marketing brochures in simpler to understand ‘plain English’ thus trying to remove complicated language or jargon. However, the problem for most of us, it must be remembered, is that we are dealing with complicated medical terminology and few of us possess the medical knowledge that is required to enable us weigh up the true pros and cons of each serious illness definition which in turn would enable us to reach an informed purchasing decision.
What could be done?
- Assuming most consumers have not the time or the inclination to educate themselves in medical terminology, we need a form of product ‘kite mark’ to act as our guide. In the UK there was a move towards standardizing serious illness definitions. In Ireland we have for example various definitions of disability (see disability at foot of page). Why shouldn’t we have a standard format?
- Products should also be designed so that policyholders do not have to wait until later in the disease process to make a claim. (Rheumatoid Arthritis comes to mind).
- The policy should pay benefits to match the severity of the condition and the likely duration of symptoms (Parkinson’s can be disabling, but why wait until the person becomes ‘completely bunched’. Peace of mind should mean alleviating financial difficulties for a family at an earlier stage).
- Recent disclosure regulations which were introduced to protect the consumer often make no mention of the actual definitions governing each condition covered by the policy presale. Surely there is scope within such disclosure to help policyholders make comparisons between different companies that are clear and not misleading. At present some companies appear to disclose the detail of such information when you have actually signed up for the policy, and receive the policy documentation.
What to look out for before purchasing?
- Intending customers should concentrate on the core illnesses definitions (all companies cover them) – these are the diseases that make a clear impact on our lifestyle and where most claims have been paid so far. We should have a realistic expectation of exactly what is covered but more importantly we should be aware of what is not. We should consider the true validity of products which offer impressively long lists of illnesses that they cover. We should concentrate on value for money (get as much as we can as cheaply as we can).
- Consider this, many ordinary life policies (e.g. term assurance) have a terminal illness benefit, whereby the life office will make an upfront payment of a portion of the sum assured should a person be diagnosed as suffering from an illness that is terminal (i.e. one in which death is likely within say 12 months). This certainly eases the burden for those wishing to put their affairs in order.
According to John Geraghty CEO of LABrokers.ie “Insurance is important, and it would be irresponsible for me not to recommend the purchase of a ‘serious illness’ policy as part of a persons portfolio of protection products. However, it’s a minefield out there and now more than ever, its important to seek good independent financial advice.”
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