Terminal illness benefit probably isn’t the main reason people take out life cover but it can be a valuable addition. These days it is a standard part of most term based policies and it is almost taken for granted that it will be there.
It makes a great deal of sense. After all if you meet the definition the plan is more than likely going to pay out anyway when you die so why not let the client have their payment a few months early when they or their family may already be suffering the financial effects of a serious illness as well as trying to come to terms with the prospects of the imminent departure of a loved one?
Terminal illness benefit on life cover only policies has recently come under fire in both the financial and consumer press as well as on the TV.
The criticism levelled is that terminal illness benefit is only paid if the life assured is diagnosed with less than 12 months to live rather than as soon as they are diagnosed with a terminal illness irrespective of their life expectancy.
There has also been criticism about the fact that terminal illness claims typically won’t be paid in the last 12-18 months of the policy and that this is also unfair because the life assured ‘isn’t dying quick enough’.
Is this criticism fair?
I would suggest not. But it is indicative of the general lack of understanding of and confusion between the different types of cover available.
It also doesn’t take into account what the effect on the cost of cover would be if claims were to be paid in these circumstances.
Life cover on a term based plan is designed to pay out if death occurs within a specific period of time from when the policy started.
If you live longer than the term you receive no payment. Nobody has suggested (so far!) that this is a flaw in product design. Terminal illness benefit is an advance payment of the life cover which is only payable if you are likely to die within that same period.
A further line has to be drawn to add an element of certainty that the event will happen in the timescale. That’s why insurers will only pay if the diagnosis is that death is likely within 12 months.
Few doctors will state categorically that someone will die within a much longer period. And there are conditions that will ultimately lead to death for which there is no cure but life expectancy can be anywhere between two and five years.
Unfortunately this can mean that there will sometimes be further questions about qualification periods.
However without that line being drawn, there is a possibility that cover could effectively be extended for several years past the end of the original term.
Extending cover to pay on diagnosis of any terminal illness irrespective of life expectancy would only serve to increase the cost of cover.
People who are looking for wider cover but are operating on a limited budget should therefore be considering a small amount critical illness or income protection and not relying solely on the terminal illness benefit within a life policy.
The real problem therefore is not the limitations placed on terminal illness benefit. It is the simple fact that many people don’t have the spread of different types of protection they should to cover all eventualities.
And it is this problem that the press could really help the industry solve by raising awareness and making buying protection the norm rather than the exception.
Ian Smart is head of product development and technical support at Bright Grey and Scottish Provident