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This is the fourth in a six-part series on getting the most from life assurance, by Personal Finance in association with Liberty.
The longer lives many of us will lead and our lifestyles are exposing us to a higher risk of contracting a dread disease.
Ryan Switala, head of risk product development at Liberty, says the chances of suffering a dread disease, such as cancer or a heart attack, before retirement can be as high as one in five, although the risk depends largely on your age and other factors, such as whether or not you smoke (refer to the table, link at the end of this article).
In fact, the risk of contracting a dread disease outstrips the risks covered by more traditional assurance policies, such as life assurance and income replacement, Switala says.
“Despite this, critical illness cover is sometimes relegated to the status of ‘nice to have’, when the reality is that it should be stressed as an essential component of any insurance portfolio,” he says.
Dread disease cover, also known as severe illness or critical illness cover, is a life assurance policy that pays a benefit aimed at meeting the costs associated with surviving a dread disease.
Dr Marius Barnard, the brother of Dr Christiaan Barnard, who performed the first heart transplant, is regarded as the founder of dread disease cover.
Barnard has said that you are more likely to survive a major health crisis than you are to die from it, but, having survived, your cost of living will be greater than the cost of dying.
Ideally, to best protect your financial security, you should have an income replacement policy and belong to a good medical scheme option. If you contract a dread disease, your income replacement policy will pay out while you are too ill to work and your medical scheme should cover most of your medical costs.
However, as a severe illness can put enormous pressure on your finances, you should also have dread disease cover.
Some of the additional costs you may incur as you make temporary or permanent lifestyle adjustments as a result of your illness include:
* Adapting your lifestyle. A dread disease, such as a stroke, may leave you impaired for the rest of your life. To live with this impairment, you may have to adapt your home, particularly your bathroom, or your vehicle. You may have to buy equipment, such as wheelchairs or walking aids, that give you greater independence. All of these can be very expensive.
You may have to employ a private nurse to assist you with your daily routine at home while you recover from your illness, or even permanently.
* Non-medical costs of treatment. The appropriate specialist you have to consult might live some distance away, and you may have to pay high transport and accommodation costs each time you have an appointment.
* Help at home. Your dread disease or its treatment – for example, chemotherapy for cancer – may leave you unable to carry out your family responsibilities, such as helping your children with homework or preparing meals, and you may have to hire someone to help with such tasks.
Dread disease cover can help to overcome the problems that occur when a stay-at-home parent becomes ill and is unable to look after children. This parent has no income to insure, but, should the illness leave him or her unable to look after children, the family may face the additional expense of paying a carer.
* Obtaining the best medical treatment. Life assurance companies are not allowed to offer policies that perform the same function as a medical scheme by paying your actual medical expenses. Dread disease policies are not intended to cover the costs that your medical scheme should cover, However, you cannot be prevented from using your dread disease payout as you wish, and if your doctor is of the view that there are treatments, which your scheme is not funding, that are more suitable for you, there is nothing stopping you from using the payout for that purpose.
Medical schemes make decisions on what treatments to fund on the basis of what is most cost-effective for all their members, but everyone’s condition is unique, and you may want to consider alternative treatments.
* Rehabilitation. In some cases, you may need rehabilitation after your illness or a “health event”, such as a stroke. Depending on the severity of your illness, you may require months of rehabilitation, which your medical scheme may not cover, may not cover in full, or may not cover to the extent that you would like.
* Reconstructive surgery. If you are a woman, you may want to undergo reconstructive surgery after a mastectomy or purchase wigs after suffering the hair loss associated with chemotherapy.
* The loss of potential income. Your income replacement policy will pay out if a medical assessment concludes that you cannot continue working.
However, a dread disease may leave you able to work but no longer able to pursue your career, because you have lost the drive to continue your career path or to work the same hours as you did before. This may curtail your future earnings. If you are close to retirement age, you may even consider taking early retirement.
* Preserving the ability to have children. Cancer treatments can affect your ability to have children in future and you may wish to preserve your opportunity to become a parent by freezing sperm or eggs.
* Counselling. You or members of your family may want to receive counselling to deal with the emotional stress of a loved one suffering a serious illness.
* A recuperative holiday. A lump sum payout from a dread disease policy could even be used for a holiday that will help you to recuperate after treatment for an illness.
* Finance for future loans. You may survive a dread disease but be uninsurable for up to 10 years after your illness. This could prevent you from taking out a bigger home loan or a business loan.
You may think your disability policy will pay out if you contract a dread disease, but the aim of such a policy is to provide for your needs when you cannot work, whereas a dread disease policy meets a different need.
There are circumstances when both your dread disease and disability policies will pay out, but it is possible that your disability policy will not pay out on diagnosis of a dread disease. A lump sum disability policy, for example, will typically not pay out unless you are a unable to work, and you may be able to continue working after suffering a dread disease.
STAND-ALONE BENEFIT OR PART-PAYOUT OF A LIFE POLICY?
You can buy dread disease cover as a stand-alone benefit, or your dread disease cover may be offered as an early part-payout of your life cover.
It is very important to understand which type of cover you are buying and the difference between the two.
The benefit of stand-alone dread disease cover is that if you claim on it, your life and disability cover are left intact and will pay out in full if you are subsequently defined as disabled or die.
Life assurance companies use the term “an accelerated rider on a life insurance policy” when dread disease or disability benefits are an early payout of your life benefit and the payout will reduce the amount that your beneficiaries will be paid when you die.
For example, you may take out R750 000 in life cover, with R400 000 in dread disease benefits as an accelerated rider. Should you be diagnosed with, for example, a serious cancer, the policy will pay out R400 000. Should you die from the cancer years later, your life policy will pay out only R350 000, and not R750 000.
If you have accelerated cover, once the full cover amount has been paid out, the cover usually ceases completely. On the other hand, if you have stand-alone cover, some life assurers offer you the opportunity to claim the full cover amount more than once if you suffer multiple but medically unrelated dread diseases.
Accelerated cover is far cheaper than stand-alone cover, but you must consider why you want the benefits.
Ryan Switala, head of risk product development at Liberty, says if, for example, you want dread disease and life cover to pay off your home loan should you contract a severe illness or die, then accelerated cover may be suitable.
But if you want dread disease cover to meet the additional expenses you may face should you contract a dread disease and have life cover to provide for your family when you die, you will need stand-alone dread disease and life cover.
It is important that you understand the level at which the benefits on your policy will be paid out.
Some policies pay out the full assured amount on diagnosis of a dread disease, whereas others pay out a percentage of your assured amount that depends on the severity of your illness and includes payouts for less severe illnesses.
The level at which your policy pays out will determine whether or not you can claim more than once.
WHICH MEDICAL CONDITIONS WILL YOUR POLICY COVER?
Assessing the dread disease cover on a life assurance policy can be extremely difficult. For example, there are numerous health conditions that could give rise to a claim, the claims criteria are described using medical terminology and the payout may be linked to the severity of your illness.
However, there are a few things you should know about the cover your policy offers.
The first is that the four dread diseases that most affect people worldwide are cancer, heart attacks, strokes and the need for coronary artery bypass graft surgery. Liberty’s statistics for 2011 show that these four “health events” are indeed the biggest cause of dread disease claims among its policyholders.
Cancer was the cause of 38 percent of the dread disease claims the company received, followed by the two heart conditions, at 28 percent, and strokes, at five percent.
Initially, dread disease cover focused on these four illnesses, but life assurers realised that you want certainty that your policy will pay out when you suffer from a severe illness, regardless of which illness it is.
You may have a good chance of being covered by a policy that offers cover for the four main illnesses only, but you don’t have certainty that you will be covered. Most life assurers have therefore broadened their cover to include a long list of other illnesses.
Different life assurers categorise the conditions their policies cover in different ways, with some grouping them according to the type of condition and others grouping them according to the body system affected.
Ryan Switala, head of risk product development at Liberty, says Liberty covers more than 150 different conditions that are grouped into categories such as: cancer and leukaemia; cardiac and cardiovascular system; strokes; multiple sclerosis; motor neuron disease; Parkinson’s disease; central nervous system disorders; renal disorders; respiratory disorders; muscular dystrophy; paralysis; eye disorders; speech disorders; loss of, and loss of the use of, limbs; major burns; and Aids.
In the category that, for example, covers the cardiac system, many different conditions are covered, including heart attack, bypass graft, heart transplant, and so on.
A list such as the one above may not be exhaustive, and therefore a few assurers include a “catch-all” benefit for illnesses that have not been specified. A few life assurance companies include this benefit automatically, whereas others charge extra for it to be included in your policy.
The “catch-all” benefit helps to ensure that you will still be covered by the policy should you suffer from a very rare critical illness or from one that has not yet been discovered, Switala says.
The “catch-all” benefit is typically based on criteria that measure how much of your body is impaired and unable to function normally – known as a Whole Person Impairment – or on criteria that consider whether you are able to perform defined daily activities.
The Whole Person Impairment criteria that life assurers use were defined by the American Medical Association, Switala says. Liberty uses both Whole Person Impairment criteria and activities of daily living in its “catch-all” illness definition and includes terminal illnesses in its “catch-all” definition, he says.