Time to review your financial protection

10 July 2017

It is often said that insurance provides financial peace of mind – until you make a claim and your insurer starts to cut up rough.

A cynical comment maybe, but that was certainly the case with payment protection insurance (PPI) in the 1990s and early 2000s when cover was missold by the bucket-load – leading to claims being routinely rejected. The banks were the guiltiest parties and they are still clearing up the mess with compensation payments totalling billions of pounds.

Once upon a time it was also the same with financial protection insurance, cover that pays out when serious illness strikes. Insurers would trawl through claimants’ medical records to fi nd reasons why they should not meet a claim. If evidence of medical non-disclosure was found (medical details not revealed when a policy was bought), the claim was rejected – however trivial the nondisclosure. But this is no longer the case, most of the time.

The latest statistics from the Association of British Insurers (ABI) confirm this. Last year, £13 million a day was paid out by insurers on a variety of types of financial protection insurance. They include life cover (paying out on death), critical illness (paying out a lump sum following a serious illness such as a stroke or heart attack) and income replacement (paying a regular income if someone is unable to work because of long-term illness).

In total, 97% of all claims were met by insurers, although the figures for both critical illness (92%) and income replacement (85%) were not so high.

Reasons to be cheerful, then? Yes, and no.

Yes, because financial protection insurance sold today is usually superior to policies sold 10 years ago. Cover (especially critical illness) is more all-encompassing than it used to be and policy innovations mean many illnesses, such as early stage bladder cancer or early stage breast cancer, are now covered, even though they may only trigger a partial payment of the sum assured.

No, because we now have a large batch of protection policies (primarily critical illness but also income protection) that were sold a long time ago and which are no longer fi t for purpose. Yet nobody, especially the insurance companies, is alerting the holders of these policies that the cover they have may not come to their financial rescue in their hour of need.

I asked Alan Lakey of Highclere Financial Services, one of the UK’s most respected protection insurance advisers, to do a little test for me. He has painstakingly developed a database of critical illness policies that compares and contrasts cover provided by individual insurers. It encompasses policies new and old.

He compared an HSBC critical illness policy sold 10 years ago to an Aviva policy that is sold today. His database showed that the Aviva policy was superior in 88 different ways – because of better claims wording (resulting in a higher statistical likelihood of paying out), the provision of partial payments for certain conditions (where HSBC offers none) and enhanced payments for specific conditions. HSBC’s policy did not offer one single area of advantage.

Lose a leg in a car accident and the HSBC policy would not pay out; Aviva’s cover would. Only the loss of two legs would trigger a payout with HSBC’s policy. I asked Mr Lakey to do this exercise because of a case concerning an HSBC customer whose claim had been refused because his bladder cancer was not considered sufficiently advanced.

Although the customer eventually got financial justice by taking his case to the free Financial Ombudsman Service (a referee in disputes where an impasse has been reached), he was a victim of the fact that his policy was dated. If he had bought cover more recently – but not from HSBC – he would probably have received an immediate partial payment under his policy (typically £25,000) without question or query.

I think it is high time the insurance industry did something about addressing this issue. Surely, it cannot be beyond them to offer long-standing customers the opportunity to upgrade their cover to that offered to new customers. I am sure these customers would be happy paying a bit more in premiums for the privilege.

In the meantime, I urge anyone with long-standing critical illness or income replacement insurance to check whether they would get superior cover elsewhere. Age and health may make the purchase of alternative cover too expensive, but it is worth a try. A financial adviser specialising in protection insurance can do the dirty work for you – but they will charge a fee: see Financial advice: is it worth it?.

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