Financial protection

In this chapter we will examine the need for critical illness protection, the features and product design of critical illness plans, underwriting and claims considerations, the difference between indivi...

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...e; all these considerations highlight the need for CIC.

We have created this presentation to introduce the topic. This will be of most benefit to those learning about this area for the first time:

CIC emerged as a major area of business in the 1980s. Advances in medical science and higher than expected claims experience have had a major impact on CIC design, structure and premium rates over recent years.

A relatively recent development is the introduction of ‘severity based cover’ where a small percentage of the sum assured may be paid if the insured suffers a condition that presents only a low risk of death, with increasingly higher percentages paid in respect of progressively more the severe conditions.

Improvements to medical science have meant that some illnesses which were previously viewed as being terminal are now treatable and have a much better prognosis. This has been reflected in higher than expected claims on CIC policies. Consequently, cover is no longer provided in respect of some conditions that were previously covered. Additionally, claims criteria have been tightened, with a focus on clarifying the threshold of the severity of a particular condition that must be met to trigger payment under the terms of a plan.

Historically, some providers covered a ...

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...esses.

A more recent development is the introduction of ‘real life cover’. Here, payments are made for heart attacks, strokes and cancers and the policy also allows for incapacity payments to be made under the income protection element of cover for other illnesses that result in incapacity. A protection fund is created within the product which can be level or increasing and payments for claims are taken from this, effectively reducing the fund. No payment is made if the policy is cancelled.

As medical science advances, products and the definitions of insured conditions will likely keep evolving.  However, where a plan is issued, the definitions contained within the policy document cannot be changed or altered in the future. For this reason, it is particularly important to review the terms and conditions of existing CIC plans carefully if considering a replacement, as although the replacement plan may offer cheaper premiums, it may also offer lower coverage.

What was the original aim of the ABI Statement of Best Practice (on CIC)?

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A few life offices offer stand-alone policies with no life cover attached. These can be guaranteed or reviewable and, historically, many were written as a unit-linked plan. Due to the higher level of risk, premiums for CIC than they are for a similar level of life cover and underwriting is stricter. These policies can be for a limited term, typically up to 35 year...

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...has recovered from a critical illness effectively being unable to obtain life cover at a reasonable cost. Where critical illness cover is included within a unit-linked policy the morbidity risk premium is usually paid for by the cancellation of units.

How is critical illness cover treated if it is included in a life policy?

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Underwriting for CIC is based on morbidity rather than mortality and the underwriting process is therefore closer to that for income protection than for life assurance. An applicant’s medical history, their lifestyle and state of health are particularly important and the proposal form will include questions not only with regard to the life assured, but also in respect of their immediate blood rela...

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...lth.  This means that premiums can be lower in the initial years but may increase over the term of the policy.

Due to the increasing cost of guaranteed premiums, reviewable products are now becoming more common.

When assessing a proposal for CIC, why would an underwriter want to understand  the state of health of those closely related to the insured?

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Each policy will offer different levels of cover and detail the illnesses /conditions covered in the policy document, including definitions related to each condition. Most polices will offer a core list of illnesses for a basic premium and may also offer additional cover for a higher cost. The ABI requires all policies marketed as CIC to cover cancer, heart attack and stroke.

Additionally, most policies will also cover the following core conditions:

Aorta graft surgery

Benign brain tumor – where resulting in permanent symptoms

Blindness – where permanent and irreversible

Coma – with permanent symptoms

Coronary artery bypass grafts

Deafness – with permanent symptoms

Dementia – where of specified severity and occurring before a specified age

Heart valve replacement or repair

Kidney failure – requiring dialysis

Loss of speech

Loss of limbs

Major organ transplant

Motor neurone disease

Multiple sclerosis

Paralysis of limbs – total and permanent

Parkinson’s disease

Third deg...

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... the insured suffers a prolonged period of non-critical illness or unemployment.  A deferred period, typically 26 weeks, usually applies, after which the policyholder will be able to stop paying premiums and still have the security of continued protection until a claim is made, the policy ends or they return to full health

Terminal illness cover will allow the sum assured to be paid out if the insured has a life expectancy of less than 12 months, but often will not pay out in the last 12 or 18 months of a policy

Some policies allow index-linking allowing the sum assured to be increased each year at a set percentage or in line with inflation without further evidence of health, however if this option is taken premiums will also increase each year

Some policies provide a guaranteed insurability feature, allowing the sum assured to be increased on a number of specified life events such as marriage or birth of a child, without the need for further medical evidence

The main benefit of a guaranteed insurability feature is:

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On submission of a successful claim, and subject to the insured surviving to the end of any specified survival period, the insurer will pay out a lump sum as per the terms of the policy. It is important to note that the burden of proof is on the claimant.

When a claim is submitted, the insurer will test the details of the insured’s condition against the definitions set out in the policy document and will then examine the medical evidence to ascertain whether: ...

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...s, but the premium must be returned  

- If the insurer would have accepted the risk but on different terms it can treat the contract as if those terms applied and where the insurer would have charged a higher premium any claim can be proportionately reduced

If non-disclosure is innocent then the insurer cannot apply a remedy and must pay the claim in full

Who is responsible for proving a claim under a CIC policy?

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The payment of a critical illness benefit is not ...

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...s, after all, the purpose of arranging the cover.

Where a policy includes both life assurance and CIC it can still be written in trust but this could create a problem. Under the terms of most trusts the life assured will not be the beneficiary or even potential beneficiary, meaning that the benefits payable would not be paid to them. For life assurance benefits this does not present a problem &n...

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...t a claim without the usual requirement for a grant of probate / letters of administration

The CIC benefits are held for the absolute benefit of the life assured meaning that they will have full access to the benefits

Why would a normal discretionary trust not be suitable for a plan that includes CIC?

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There is an increasing trend for employers to purchase group CIC cover for their employees:

These are usually available to larger employers and can be written on a similar basis to group death in service schemes, although not as part of a registered pension scheme

Cover is typically expressed as a fixed amount or a multiple of salary and will cease ...

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...ese will be treated as a benefit in kind and subject to income tax

Sums assured are usually a fixed amount or a multiple of salary

Benefits are usually paid directly to the life assured and are therefore tax free

How are employer-paid premiums on a critical illness cover (CIC) policy treated for tax purposes?

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Income protection and critical illness plans are designed to meet different needs:

Income protection

Critical illness cover

IPI is designed to replace income in the event the insured is unable to work due to sickness or injury, enabling the insured to maintain their pre-disability standard of living. There are no specified illnesses or conditions.

CIC plans aim to enable an individual to cope with the additional costs arising on diagnosis of a serious illness or condition, paying out a lump sum only on the diagnosis of a specified illness or condition. Payment of the benefit is based on the definition of the illness and not whether the insured is unable to continue ...

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...ightly defined in the policy terms and typically only serious / severe conditions are covered.

The plan is permanent and will remain in force for as long as the insured maintains premiums, allowing for multiple claims during the lifetime of the policy.

On payment of a successful claim the policy will usually lapse. Life cover buy-back cover may be available but this will only provide cover for a restricted level of life cover.

IPI provides a replacement income to maintain the insured’s lifestyle whilst they are unable to work through sickness or injury.

CIC provides a larger lump sum payment that could be used for any purpose including paying off liabilities.

This revision test (opens in a new...

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... test will be added to your CPD certificate.