Critical illness insurance explained by industry experts

Critical Illness insurance and critical illness cover

Critical illness insurance pays out a certain amount of money, usually in a lump sum, upon diagnosis of a critical illness in return for premiums. But rather than that event being death, it is a serious – possibly terminal – illness such as Cancer, Stroke, Heart Attack, Alzheimer’s, Parkinson’s, blindness and so on. And rather than being paid to beneficiaries, it is paid to the policyholder.

Critical illness insurance is an intermediary form of insurance between life insurance and medical insurance.

What are the benefits of critical illness insurance?

First, remember that if you do have adequate medical insurance, you may still be liable for co-payments. On normal day-to-day procedures these may be affordable, even if they are a nuisance. But in the case of serious illness, they can add up substantially and really hurt your finances. Many critically ill patients and family members find themselves facing substantial out-of-pocket charges at the end of their illness, in spite of high-quality medical coverage. Furthermore, having a critical illness can result in substantial expenses in addition to the medical procedures themselves: EG, lost income and medication. By paying out in these serious situations, critical illness insurance complements standard medical insurance.

To illustrate, in the USA, where public healthcare isn’t available as in Europe, studies have found that medical issues have played a role in 60% of bankruptcies, and that, incredibly, 78% of people did have medical insurance at the beginning of their illness – but either lost it when it wasn’t renewed, when they missed payments, or were simply driven to bankruptcy in spite of it by high co-payments and other illness related costs.

Also, because critical illness insurance pays a pre-determined amount in case of pre-determined illnesses, rather than promising to cover a very broad range of medical expenses, it can be much cheaper than medical insurance.

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Furthermore, with critical illness insurance, the insurance company isn’t paying for specific medical procedures, allowing the policyholder to use the funds flexibly. They can choose to use them for medical care, but can also take one last holiday, leave an inheritance or pay down a mortgage. That can be particularly relevant for diseases such as Cancer, in which some patients decide that the incremental treatment is not worth the suffering, and prefer to enjoy their last days as best as possible.

As compared to life insurance, the advantage is that the pay-out is received whether the policyholder dies quickly from the illness or not. Nowadays many terminally ill patients survive for many years before passing away. In some fortunate cases, those with previously terminal illnesses now ultimately manage to recover. The pay-out of a life-insurance policy would occur later, simply because death has not occurred yet. Whereas the critical illness policy would pay out right away. From a technical perspective, critical illness insurance is interesting because it allows you to insure for a situation in which you will need the money most.

What are the risks?

Because these policies pay out in the case of specific illnesses, and because these illnesses and the requirements for their diagnosis have to be laid out in detail in the contract, there is the risk that a policyholder has a specific serious ailment that isn’t covered, or that the ailment is not deemed critical enough to merit payment.

For example, “Cancer” is an umbrella term that covers many different types of tumours, on many different parts of the body, at many different stages of development. A tumour might not be deemed malignant, or even if it is, it might not be deemed life-threatening. While on one end of the spectrum it might be clear that a patient with a small tumour is not in critical condition, and, on the other, a patient with cancer that has spread to several major organs clearly is. The grey-area in-between can lead to dispute.

Sometimes the specific cause comes into play: some policies cover HIV infection from blood transfusion, but not from drug use or unprotected sex.

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There are other important legal clauses to be aware of, such as: The time a patient would have to have survived the illness in order for the case to be deemed one of critical illness rather than simply of death (usually a week or two); The criteria for diagnosis of a disease: any doctor’s opinion? A specialist’s?

To some degree, the potential for this kind of dispute is an inevitable by-product of this being a type of policy that pays out in complex and specific situations rather than one quite un-contestable one (ie. death), in the case of life insurance. It is also a relatively new kind of insurance – while life insurance has been around for centuries, the first critical illness policy was issued in 1983.

However, there have been controversies in which patients have claimed that insurers had been misleading in their promises and were dishonest in using the small-print to avoid their obligations. Reportedly this led to greater public scrutiny and better transparency and behaviour.

But in any case, it is clear that you should choose your provider carefully.

Whom is critical illness cover appropriate for?

People who either have limited or no medical insurance, and would like to be able to afford a higher standard of care if they face a serious illness; People who are concerned about the co-payments they’d face on their medical care, even they do have adequate medical insurance; People who have dependents who would face financial difficulties not only if they passed away, but if they became seriously ill. This is the case for many of those who buy life-insurance.

If you are an independent contractor, for example, your dependents might face difficulties while you are ill due to your lost income, even if you do have adequate medical and life insurance; People who, regardless of medical and life insurance cover, would like to have extra funds in such a critical condition for ‘one last holiday’, donations, and so on.

How does it work?

Just like in Medical and Life insurance, providers make you offers based on your risk factors for critical illness such as age, health indicators eg. weight, smoking, family history and profession. If you have high risk indicators for a certain condition, the provider may not be willing to cover you for that one.

The amount of information requested can vary according to the amount of protection. A simple plan offering a $10,000 pay-out might only involve a questionnaire, while a plan for $1 million might ask for more detailed medical information, a consultation, and so on.

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You are insured for a given period of time, during which you pay premiums. As with term life insurance or private medical insurance, as you grow older, the likelihood that you will succumb to illness increases, so when the policy is renewed the premiums do increase and can become unaffordable for the elderly.

Because they pay out in related situations, critical illness insurance is often sold as a ‘bolt-on’ option to life insurance. So you may also come across it in that context.

Who are the main service providers?

Critical illness cover is provided by leading insurers such as Zurich and AXA, among many others. As mentioned above, it is important to choose a trustworthy provider. Many publish what percentage of claims are paid out, and how many and which specific conditions are covered.

Can I do it alone or do I need a broker/financial advisor?

Critical illness cover can be purchased via a broker or directly.

Although critical illness cover can be bought directly, because of the varying details of the different policies, it does make sense to rely on someone who has experience in the subject.

As with all other kinds of insurance (such as medical insurance and life insurance), insurance brokers are expected to know the details of the various providers and products, understand your situation and help you find the most appropriate alternative. In some jurisdictions, they are legally required to work in your best interest.

Financial advisors can also help by helping you decide what kind of insurance policies are most appropriate in light of your overall financial and personal situation. As mentioned above, you might or you might not need all the different kinds of insurance.

Many advisors are insurance brokers themselves and can help you through the entire process, while others can advise you on the high-level outline of what you need and then refer you to a broker.

Critical illness insurance pays out a fixed sum in case you are diagnosed with one of a list of specific serious illnesses during the term of the policy. It is a relatively recent form of insurance that lies between medical and life insurance and, given the significant expense of serious illness, can complement them. Whether it is appropriate for you depends on your overall personal and financial situation and current medical and life insurance cover, so it can be helpful to consult your financial advisor. Because it insures against very specific risks, it is also important to ensure you properly understand what is covered and have a trustworthy provider. This is another point on which the assistance of a specialist is helpful.


CHRIS LAND, FINANCIAL ADVISOR

Chris has 9 years’ experience as a UK pension specialist and licensed financial advisor. He specialises in helping clients make balanced financial decisions to grow their personal wealth.

Chris is licensed with Globaleye, an award-winning international financial advisory firm established in 1999, with 10 offices and 15,000 clients worldwide.


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