How to ensure your cover pays out

11 September 2009

Being diagnosed with a serious illness is one of the most stressful events that could happen to you.
However, it is a relatively common experience. Cancer Research UK says that more than one in three people in the UK will develop cancer at some point in their lives. And over 270,000 people suffer a heart attack each year, according to the British Heart Foundation.

Statistics from reinsurance firm Munich Re show that 32 out of every 100 men between the ages of 40 and 70 will develop a critical illness. Out of those 32 men, 15 will develop cancer, 10 will have a heart attack, five will suffer a stroke and two will have coronary artery by-pass surgery.
Women fair slightly better, with one in four women between the ages of 40 and 70 likely to develop some kind of critical illness.

If you do receive such a diagnosis – as well as dealing with the illness itself, the emotional shock and the subsequent treatment – you will need to consider how you will cope financially if you become too ill to work. Will you be able to keep a roof over your head? How will you support your family?

Fortunately, there is a type of insurance that is designed to protect you financially if you are diagnosed with certain life-threatening or debilitating conditions. Critical illness insurance pays out a tax-free  lump sum, which you can spend on whatever you like – the mortgage payments or private medical treatment, for example – should you need to claim on your policy.

“You could be off work for a long time, or even have to give up work completely, and if you have bills to pay and dependants the repercussions on your finances could be massive,” says Matt Morris, spokesperson for protection broker LifeSearch. “And you don’t want to have to find money to pay bills while you are trying to recover. This is where a critical illness policy comes in.”

But before you take out cover, read on for answers to the most common questions regarding critical illness.

Q: Where can I buy a critical illness insurance policy?

There are a number of insurers that offer critical illness policies, including Scottish Widows, Prudential (offered through PruProtect), BUPA, Legal & General, LV=, Friends Provident and Norwich Union.

However, although you can buy a policy directly, it’s often best to seek the advice of an independent financial adviser to make sure you get cover that is suitable for you.

As well as giving you advice, buying a policy through an IFA will also give you more rights if things go wrong. Essentially, if you take advice, you will have recompense via the Ombudsman if it turns out to be inappropriate. But if you buy a product directly, it’s a case of ‘buyer beware’ – this means if you’ve taken the decision to buy a product unaided, you must take full responsibility for your actions.

Find an IFA in your local area

Q: I’m still young and healthy – should I wait before I take out a policy?

It’s a good idea to buy critical illness cover when you’re young as it gets more expensive with age. You’re also more likely to suffer from other health problems the older you get, which will also push your premiums up.

Your gender, lifestyle, whether you smoke, how long you want the cover for and the amount you require will all affect your premium.

Q: What will my policy cover?

Policies can differ widely regarding the number of illnesses they cover, policy exclusions and limitations, and how the insurer calculates payouts. It’s important that you fully understand the policy you are buying, in order to ensure that it meets your needs and that any claim you may make won’t be turned down.

However, if an insurer calls its cover ‘critical illness insurance’ it must offer cover for cancer (but only advanced cases), heart attack (if sufficiently severe) and strokes (resulting in permanent symptoms). Most policies will also cover coronary bypass surgery, kidney failure, major organ transplants and multiple sclerosis.

The average policy covers much more than this – typically between 25 and 30 conditions. The most comprehensive policies will also cover loss of sight and permanent loss of hearing. Some policies also provide cover against the loss of a limb.

Q: So will it pay out if I’m diagnosed with any of the above conditions?

When you take out a critical illness policy you’ll pay a monthly premium, which will insure you for a set sum should you ever need to claim. If you get diagnosed with any of the conditions covered by your policy – and meet the definition of the condition set out in your policy documents – your policy will pay out a lump sum.

It sounds simple, but if you’re diagnosed with cancer, for example, don’t assume your policy will pay out. Some insurers only cover certain types of cancer, and you might not be covered for some early-stage cancers or those that do not spread.

This could include some types of breast and non-invasive skin cancers. Likewise, if you have a heart attack, it will need to be at a certain level of severity for the insurer to pay out.

Some policies work in a different way. For example, PruProtect’s Serious Illness Cover works on a severity basis rather than an all-or-nothing approach. It includes less severe forms of cancer, with payouts graded by how serious your illness is.

PruProtect spokesman Kevin Carr explains: “There are six levels of severity, ranging from 10% to 100%, including early-stage cancers and blindness, where we will pay out earlier than traditional critical illness plans.”

Q: Are there any other exclusions I need to be aware of?

Whichever critical illness policy you take out there will be some exclusions and certain circumstances where the policy won’t pay out. These should be listed on the key features document you receive when you ask for a quote or take out a policy, and it’s vital you understand them.

The Association of British Insurers (ABI) has published model definitions for the most common exclusions, which are aviation (apart from normal passenger flights); criminal acts; drug abuse; failure to follow medical advice; hazardous sports and pastimes; HIV/Aids; living abroad; self-inflicted injury; war and civil commotion. But not all providers will have all these exclusions – some cover HIV, for example.

The information in the key features leaflets should help you compare different policies. It will also tell you whether your premium is fixed or will go up over time.

Most policies only pay out after a ‘survival period’ of typically 28 days, which means they won’t pay out if you die within 28 days of meeting their definition of critical illness.

Q: I’ve suffered a serious illness in the past. Will this affect my premium?

To take out critical illness cover you need to complete a proposal or application form. This will ask about your own medical history and whether any members of your family have suffered major illnesses in the past. In some cases, you might be asked to go for a medical checkup.

It’s important to be honest about your lifestyle and medical history. If you have existing health conditions (so-called ‘pre-existing medical conditions’), the insurer may increase the premium or refuse to cover you at all. If you lie about your health and the insurer finds out later, it may make all the difference between your claim being paid or refused.

Matt Morris also warns: “If you have suffered a previous illness, such as cancer, the insurer may well exclude that condition from the policy.”

Q: How likely is it that my claim will be rejected?

In the past, many people have bought critical illness policies then found they didn’t pay out as expected. This was generally for two reasons: failure to disclose all the relevant information when taking out the policy or the illness not being covered by the policy.

If you receive a rejection on the grounds of ‘non-disclosure’, this will be because you have failed to mention something on your application form, even if this has nothing to do with your claim.

Consumer groups such as Which? have previously attacked insurers, claiming they were using non-disclosure rules to wriggle out of paying valid claims. In some cases, lengthy application forms required prospective policyholders to remember and accurately record every minor ailment and visit to the doctor over the previous five years.

Last year, however, the ABI introduced new guidelines, and since then the number of critical illness claims turned down for non-disclosure has halved.

The only way you can have peace of mind that your insurer will pay out if you should need to make a claim is to make sure you know exactly what you’re buying and to answer all the questions on the proposal form as truthfully as you can.

You should also read the policy documents so you know what you’ll be covered for. However, it seems that many of us forgo this important advice. Recent research by the financial regulator, the Financial Services Authority, found that people are still buying critical illness cover without fully understanding what they’re buying. Its study found that 68% of the policyholders it surveyed wrongly assumed they could claim for any illness that prevented them from working.

The ABI is currently working to improve consumer knowledge about what is and isn’t covered by critical illness policies, especially those concerning ‘total permanent disability’.

Most critical illness policies will offer total permanent disability insurance, which covers any illnesses and medical conditions not listed in the policy, where there is no long-term prospect of recovery. But the current definition is vague and confusing; it’s hardly surprising then that, although total permanent disability accounts for just 3% of claims, 55% of such claims are declined because they fail to meet the definition.

Q: What can I do if my claim is rejected?

If your policy doesn’t pay out when you think it should, first speak to your provider, and if that fails, you can take your complaint to the Financial Services Ombudsman.

If you’ve been sold a policy through an adviser, you have the right to claim you’ve been mis-sold. However, this will not be the case if you bought the policy directly from an insurer.

Top five tips to ensure a payout

1. Give full and honest answers to any questions you are asked about both your own and your family’s medical history.

2. Make sure you understand what the policy covers, when it will pay out and when it won’t.

3. Read the key features document that comes with your policy.

4. If you smoke, make sure you own up to this on the application form. If you say you don’t smoke and the insurer finds out you do, it may reject your claim.

5. Buy your critical illness policy through a broker or IFA – they’ll be able to advise you on the best policy for your needs.

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