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Ian Smart: Terminal illness cover isn’t the problem

Ian Smart MM blog

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

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. I have always looked on terminal illness cover as a free additional benefit.

    If it wasnt there someone could be diagnosed with a terminal illness but live beyond the the end of the term meaning that they would get nothing on death shortly after the policy finishes – can you imagine the outcry then!

  2. Given the constant press and TV ‘scandals’ which afflict protection maybe we should make a change to the Terminal Illness definition so that it states that;

    “Payment will be made if a consultant agrees that you have been diagnosed with a condition that is likely to lead to premature death and that it is probable that such death will occur within the next 5 years.”

    There are cost implications, for sure, but if we want to instil confidence in the industry and also accept that each policy facet has a price, then this is a way forward.

  3. Sometimes these comments are incredulous. So my lottery numbers come up the week after I bought them for. Can I claim the money the next week- no I can’t.
    Nothing is free – there is an interest cost for accelerating the claim payment forward. It is small but it is in the premium calculations. Make it 5 years then it starts to become significant.

    A policy holder is daignosed with say an advanced but not metastatic cancer or a myocardial infarction with significant ventricular muscle damage. 5 year survival may be 50% so is that a terminal illness?

    Let’s get real – whatever we produce will have more flaws than what we have now. Remember activities based TPD and IP was produced to solve the inequities of Any Occ definitions. Is it any better, not a chance and is probably another scandal in the making…
    What we have is good enough. If you want CI protection then buy/CI. Let’s handle the few high profile claims that arise sensitively but openly, including highlighting the positives of our products rather than slagging them off.

  4. Hear Hear, Anonymous.

    A thoughtful and sensibly argued article.

    Most customers, I believe, look upon TI as a worthwhile but ultimately free add-on benefit to their Life cover. There will always be a small number of emotive sensitive cases where the definition cannot support payout. Other protection types will fill this hole.

    We already have expected premium hikes for the ridiculous ECJ ruling. Let’s not start with TI please.

  5. Perhaps the discussion should alter to…should terminal illness cover be included in life plans or should it fall within the domain of critical illness?

    If it is within a life plan then we really need to avoid bad press and consumer distrust by aiming to ensure that it pays out when deemed appropriate.

    A client with a terminal illness does not care to differentiate between the semantics of the plan when in their view they are dying and that’s it.

    I agree that more CI should be purchased as it solves many of these problems but if it remains within life plans it needs to reflect consumers reasonable expectations and, of course, be priced accordingly.

  6. Agree completely with Mr Smart’s comments. If the TI definition were to be changed to five years, this would increase the cost substantially. Although the layman’s definition of a terminal illness may be an incurable one, the fact is that the definition is clearly stated in the policy.

    If you want CI, then buy CI. It always surprises me how many advisers seem unable to tell the difference.

  7. I was the first anonymous but didn’t intend to comment anonymously. Alan, whatever is done there will always be claims that occur just after cover expires. It doesn’t seem fair when these occur but the contract term and terms are quite clear, or should be. Most doctors won’t give a definitive “will be dead in 12 months” unless they are certain, or pushed by their patient. As you say the discussion should be around selling to needs and if this dictates an amount of CI then that that is what should be recommended and purchased.

  8. It doesn’t help when ill-informed journalists from tabloid news papers use the terms “critical illness” and “terminal illness” to mean the same thing rather than pointing out the difference.

  9. I am sure most clients don’t buy life cover or from one provider over another because of TI or its definition. Most are unaware of it being part of any plan. So they won’t necessary realise they need or want critical illness at point of advice/sale. It is up to us advisers to point out the features but I doubt many remember much other than they have some cover now and in the event of any instances whether TI, CI or even disability they may call adviser, insurer or frantically check their paperwork to see if they are covered – even if they bought life only. Of course costs would rise but I agree with Alan et al proposals above and surely cost cannot be a barrier to improving.

  10. This is a bizarre discussion. The TI is there purely as an accelerator for a claim that would be paid anyway. If people are being led to believe that it’s any form of extra cover then I’d suggest it isn’t an argument to change the product.

    There’s products out there that cover diagnosis of critical illnesses, there’s products that cover an inability to work, there’s products that cover the need for private health care. Why do we seem to be constantly trying to mash all our products together into some sort of one-size-fits-all solution?

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