Policies are costly and rarely pay out - except to advisers on fat commissions.
March 18 2001
By Kathryn Cooper
Insurers have been accused of pushing expensive critical-illness policies that give lucrative commission to financial advisers but rarely pay out to customers.
Critical-illness insurance, which can cost up to £400 a year, is designed to pay a lump sum when you are diagnosed with one of a list of serious illnesses, including cancer, heart disease and multiple sclerosis.
Only 4% of the population is covered and insurers are desperate to boost sales, partly because of a drop in profits from other products, such as unpopular endowment policies.
Firms are persuading financial advisers to push policies by offering sky-high commission rates. A favoured adviser could get initial commission of about 135%, which means all of your premiums in the first year of the policy go to the adviser, plus another 35% from the insurer's own pocket. They would also get annual commission of 2.5% for the life of the policy, usually between 10 and 20 years.
Advisers and insurers regularly employ scare tactics to persuade customers to take out cover. For example, Norwich Union says that one in two people in Britain will be affected by serious illness such as cancer and heart disease.
But the insurer does not tell you that critical-illness insurance is highly unlikely to pay out. Only about 2% of the 3m policies have paid out, according to the insurer Swiss Re - and one in five claims is rejected. Swiss Re puts the high rejection rate down to the consumer's failure to understand the policies and claims for conditions that are not covered.
Craig Wetton of Chartwell, an independent financial adviser, says: "There is always a danger that products with commission rates this high will be mis-sold. This is especially true of complicated products, such as critical-illness insurance. Consumers need advisers who will sit down and explain the policy, rather than just line their pockets."
Critical-illness insurance is often sold alongside life cover when you take out a mortgage. While the life insurance pays out when you die, the critical-illness policy pays a lump sum if you fall ill.
Insurers should still pay out even if you recover from the illness and can eventually return to work. But they insist you should be ill for at least 28 days before you get your cash.
Many policyholders face frustrating wrangles with their insurer before they can claim because the small print is often a minefield of exclusions. Consumers regularly complain that financial advisers fail to explain how critical-illness cover works when it is tacked on to their mortgage.
The Association of British Insurers (ABI) has introduced guidelines to make policies more transparent. But every year scores of customers are forced to sell their homes when insurers refuse claims, even though they are too ill to work.
The ABI dictates that critical-illness insurance should cover seven core conditions - cancer, heart bypass surgery, a heart attack, kidney failure, a major organ transplant, multiple sclerosis and a stroke.
Policies usually cover other conditions, but you could pay more and statistics suggest it may not be worth the extra cost. Swiss Re says 97% of claims are for the seven core illnesses.
But the definitions of these core conditions are not straightforward. Policyholders who need heart surgery may be excluded if consultants use new techniques, including laser treatment. Customers who have a heart attack may not get their money if less than about 30% of the organ is damaged.
Insurers can refuse to pay out if you fail to reveal your full medical history. In one case, Scottish Provident rejected a claim for multiple sclerosis because the policyholder failed to divulge a visit to the doctor about a tingling sensation. The customer had forgotten about the apparently trivial incident, which happened years before the claim. But the firm said it could have been a sign of multiple sclerosis and insisted that it should have been informed.
Penny O'Nions of the Onion Group, an independent financial adviser, says: "Customers must disclose all visits to the doctor in case they show signs of a pre-existing condition."
Critical-illness insurance may also cover any condition that causes permanent disability and means you can no longer work. But O'Nions warns that insurers may pay out only if you are unable to do any job, not just your own.
So a surgeon who damages his hand and can no longer carry out his own profession may not receive a payout because he can still do other work.
David Griffin, 52, battled with Barclays Life over his critical-illness policy for a year. But after the intervention of The Sunday Times last month, the insurer finally paid out.
David, a royal chauffeur from London, took out the policy to cover his mortgage in 1993. In March last year he was diagnosed with coronary heart disease and had to undergo complex surgery. The illness left him unable to work for nine months.
But Barclays turned down the claim because of an obscure exclusion in the small print. Most critical-illness policies pay out if a patient needs a coronary artery bypass, but exclude a new technique known as balloon angioplasty - the treatment given to David.
The senior consultant who treated David even condemned the insurer's decision as 'dangerous' and Barclays has now paid him in full, with an extra £1,000 for the inconvenience.
"I fully expected Barclays to pay out when I developed heart disease and I am disappointed that I had to wait over a year for my money," says David.
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