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Critical Illness Can Seriously Damage Your Financial Health

Feb 24 2004
Belfast News

Most people take their health for granted, but when things go wrong it can have disastrous implications on your finances.

Critical Illness and Income Protection are two of the most important forms of cover which people should have, yet thousands of people neglect to take them out.

Last year, Swiss Life (UK) commissioned an online survey of over 2000 people to assess opinions towards income protection and other types of insurance.

Overall, 51 per cent of the sample conceded they would not be able to meet financial commitments (mortgage repayments, household bills etc) for longer than three months if they were off sick for an extended period of time.

For longer than six months, the figure rose to 68 per cent. And in the 18- 29 age group the respective percentages were 70 per cent and 83 per cent.

Yet, when the same people were asked to rank the most important forms of insurance, the, leading contenders were given as life assurance (28 per cent) and household (25 per cent).

Protection products such as critical illness (CI) cover, income protection (IP) and health insurance all drew a rather sickly response, scoring around the 7-8 per cent level.

Further, almost one third of respondents were unaware of what the government provided per week to those too sick to work and one quarter said they would be reliant on savings. Alarmingly, a Government survey shows that around half of all households have less than £1,500 in savings.

Clearly there is a need to compensate for loss of working income when severe or chronic sickness strikes and CI and IP should be viewed as complementary rather than alternative insurance options.

CI cover first appeared in the UK in the late 1980s (the concept originated in South Africa, developed by the brother of the famous heart surgeon Dr Christian Barnard).

Although initially offered as an add-on to term, whole life and endowment policies, nowadays it is usually linked to mortgage protection or sold as stand-alone insurance cover.

There have been various CI refinements and tweaking over the years but the basic premise remains: it pays out a lump sum if you're diagnosed with any of the medical conditions covered by the policy.

Five conditions consistently make up over 90 per cent of all claims - heart attack, cancer, stroke, coronary artery disease surgery and multiple sclerosis.

So the CI lump sum can mitigate the immediate short term financial (and emotional) consequences of a serious illness.

Guaranteed CI policies are socalled because they charge the same premiums for the whole life of the policy. But because of uncertainty about future medical developments, insurers are switching to reviewable rates which, as their name suggests, can be changed at the discretion of the provider.

Reviewable premiums are usually lower in the early years, but tend to increase rapidly as you get older.

However, over the past 18 months, guaranteed CI premiums have rocketed. The biggest worry facing insurers over guaranteed premiums is that claims will increase as it becomes easier to diagnose critical illnesses early, yet they will have no power to compensate for this increase by charging higher rates.

CI insurers have been left playing a game of musical chairs. As each in turn has found itself exposed as the cheapest in the guaranteed market, it has usually been only a matter of weeks before it has raised premiums because it cannot afford to run the risk of writing too much business.

CI cover is still a relatively young product, having only been around for about 15 years.

In its early days, it was offered by only a few providers and claims were relatively rare.

But, over the past few years, as medical technology has improved, more people have made claims and, perhaps more importantly, more have then gone on to recover from their illnesses.

Reinsurers, who underwrite the risks taken by insurance companies, have been putting insurers under huge pressure to change their pricing policies.

But suppose your medical condition is such that you never recover and return to work? Income Protection provides the answer here, allowing ongoing payments to replace earned income if you're too disabled to work over the long term.

The amount payable depends on the premium which in turn reflects such aspects as age, sex, occupation, length of deferral period and definition of disability. (Interestingly, women generally pay more than men in premium terms, because they are deemed to have a worse sickness record.)

IP also pays out for certain conditions not normally covered by CI, the two most notable being mental disease and that scourge of the working population, back trouble.

It makes sense to have both types of cover and there are comprehensive packages combining IP with CI, life assurance, waiver of premium etc.

There's also low cost cover where IP benefits are payable only for a predetermined maximum time, second-event CI schemes, tiered benefit arrangements and 'buyback' facilities after a CI payout and ceasing of the policy, you can apply for a replacement 'death only' variant without having to supply up to date health information.

It's worth remembering that each year there are 65,000 incidents of heart attacks among UK men of working age according to the British Heart Foundation.

Breast cancer affects 1 in 9 women; each year upwards of 40,000 British women are newly diagnosed with the condition.

As it is frequently purchased in a mortgage protection-related situation CI cover is more prominent among the younger professional groups, a situation reflected in claims trends. Almost 50 per cent of female CI claimants and around 35 per cent of males are aged under 40.

Males account for 90 per cent of heart attack claims and 89 per cent of those for coronary heart surgery while females make 55 per cent of all cancer claims and 65 per cent of multiple sclerosis ones.

Copyright © 2004, Trinity Mirror Plc