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This is the fifth in a six-part series on getting the most from life assurance, by Personal Finance in association with Liberty.
Advances in medical science have significantly improved our chances of surviving a dread disease, with the result that more and more people are succumbing to a serious illness a second or third time.
Liberty estimates that about 10 percent of the dread disease claims it pays are to policyholders who have claimed previously, and on its older policies as many as 20 percent of claims are by policyholders who have claimed previously.
Some critical illness policies pay out the full insured amount on diagnosis of a dread disease, whereas others pay out a percentage of your insured amount depending on the severity of your illness.
When a payout is linked to severity, the policy is said to have tiered benefits. Tiered benefits are normally structured so that if your illness becomes more severe, you can make a second claim to top up the initial payout.
Both tiered and non-tiered benefits may allow you to claim multiple times if you suffer from illnesses that are unrelated – for example, if you have a heart attack and then, a few years later, you are diagnosed with cancer.
There are arguments for and against policies that offer tiered severe illness benefits.
Ryan Switala, head of risk pro-duct development at Liberty, says tiered benefits were introduced so that payouts match the severity of your medical condition and so that less severe conditions can be covered at a reasonable premium.
Policies with tiered benefits tend to cover a wider range of events that can lead to a claim, he says.
Life assurers were originally in one camp or another when it came to tiered benefits, but there has been a convergence in the design of policy benefits, Switala says.
Some of the life assurers that offered cover only on the basis of a 100-percent payout have started to include cover for less severe events, but the payout for these events is a percentage of the full amount.
On the other hand, some assurers, such as Liberty, that offer tiered payouts also offer an optional benefit that will pay out the full insured amount for certain critical illnesses.
In favour of a full payout
Life assurance companies that believe a dread disease policy should pay out the full insured amount on diagnosis of a severe illness say most claims are for milder forms of one of the four most common illnesses: heart attacks, heart bypasses, cancer and strokes.
Life assurers that are in favour of full payments on diagnosis expect that claims for “mild” episodes of a severe illness will continue to increase relative to claims for more serious episodes, because the methods for detecting severe illnesses are improving and becoming more readily available, and more people are taking precautions against more serious occurrences of severe illnesses.
Assurers offering 100-percent payouts on diagnosis of a severe illness, regardless of the level of severity, believe that even at “mild” levels an illness can have a huge impact on your lifestyle.
Although you may be able to work after a “mild” episode of a severe illness, dread disease benefits are not linked to your ability to work but to your ability to cope with work, these assurers say.
At a lower level of severity, a dread disease or critical illness may have cost implications that are similar to or greater than those for a more severe form of the same illness. A milder form of an illness may require more treatment – for example, aggressive treatment during the early stage of cancer. This can result in a major upheaval to your lifestyle and involve a number of expenses.
A partial payout on your severe illness policy may therefore be insufficient to meet your expenses, these assurers argue.
If the 100-percent payout is more than you need, you can invest the balance of the proceeds and use them to cover future financial needs.
Finally, the 100-percent benefit is simpler than a tiered one, these assurers argue.
In favour of tiered benefits
Life assurance companies that offer partial payouts linked to the level of severity of an illness say tiered benefits ensure you have appropriate cover when you need it.
Advances in medicine and medical technology are resulting in many people recovering completely from severe illnesses, and severity-based payments are a response to this, these life assurers say.
They argue that when your illness is not that serious, you do not need a large payout, because your recovery will usually be complete and the impact on your lifestyle will be less than it would be in the case of a more severe illness.
Tiered benefits can be paid out at an earlier stage of an illness and can offer cover for a wider range of medical conditions.
Tiered benefit policies typically pay out 25 percent, 50 percent or 75 percent of the insured amount.
However, if your medical condition progresses to a higher level of severity, you can claim the balance of your insured amount. For example, if you have stage one cancer, you may be able to claim a benefit of 25 percent of your insured amount, but if your cancer progresses to stage four, you can claim the remaining 75 percent.
Many policyholders have dread disease cover and lump sum disability cover as an accelerated benefit on their life assurance policies. In this case, tiered benefits may be the better option, because a 100-percent payout for an illness of a low severity will have a significant impact on your life and disability cover.
If dread disease cover and disability cover are offered as an accelerated benefit on a life policy, it means that the same insured amount covers you for severe illness, permanent disability and death. A claim for either dread disease or disability will deplete (partially or completely) the benefits that will be paid out when you die.
Dread disease and disability cover as an accelerated benefit is cheaper than taking out stand-alone policies for each risk.
CAN YOU REINSTATE YOUR BENEFITS?
Life assurance companies that offer both tiered and untiered benefits may allow you to reinstate your benefits following a claim.
If an assurer allows you to reinstate your cover after an initial claim and you make a subsequent claim, the total amount you claim could be more than the amount for which you were initially insured.
If your policy allows you to reinstate the cover, the cost for doing so will be built into your premiums when you first take out the policy, and so these policies will cost more than those that do not allow you to reinstate your cover.
However, the ability to reinstate your cover may prevent you from facing unaffordable premiums on new cover or finding that you are denied cover when you most need it.
Accelerated benefits typically cannot be reinstated, Ryan Switala, head of risk product development at Liberty, says.
GRID HELPS YOU TO UNDERSTAND BENEFIT LEVELS
Most life assurance companies that sell dread disease cover have agreed to provide you, as a potential policyholder, with a standardised disclosure grid that shows how their policies pay out at four defined severity levels for the four main severe illnesses.
The Association for Savings & Investment SA drew up the Standard on Disclosures for Critical Illness Products Grid to help you compare across severe illness policies the cover for the four main dread diseases: stroke, cancer, coronary artery heart bypass and heart attack. The grid has been in use since late 2009. Life assurers must use the grid’s standardised definitions and severity levels and state what their payouts will be for the four illnesses defined in this way.
It is important that you are aware of the percentages at which your policy will pay out for each level of a severe illness, as well as the arguments for and against full and partial payouts. And remember that the payout level – along with a host of other factors – will affect the premium you pay.
Cover for any illness beyond the four listed in the disclosure grid, or at severity levels below those listed in the grid, will also affect the premium. This additional cover could be very valuable – particularly if you are at risk of contracting a less common illness that runs in your family.
lllnesses beyond the four most common ones may be covered at 100 percent or on a tiered basis, Ryan Switala, head of risk product development at Liberty, says.
The cost of the cover will also be affected by any guarantees on the level of the premium increases, the ability to reinstate the cover after a claim, and whether the benefits are stand-alone or combined with other forms of cover, such as life and disability cover.
COVER THAT TAKES ACCOUNT OF ADVANCES IN MEDICAL SCIENCE
The rate at which medicine and medical practices are advancing poses a problem if you want your dread disease policy to provide benefits that will still be relevant in many years’ time.
At least one life assurance company has introduced a benefit that provides for the payment of claims when the policy’s original criteria for a particular condition become outdated as a result of medical advancements.
Dread disease policies typically define the medical conditions and the level of severity for which claims will be paid.
The criteria used to establish the legitimacy of a claim often rely on a classification system, a procedure, or a test. The claims criteria will be appropriate when you take out the policy, but they may become outdated over time.
Liberty has therefore introduced a new feature on its dread disease policies – Medical Advancement Protection. This benefit provides a set of rules for assessing claims where the original claim requirements have become outdated due to medical advancements.
Medical Advancement Protection ensures you will still be covered for a condition as long as your symptoms would have qualified you to be paid a benefit at the time you took out the policy, and appropriate medical literature shows that the new surgery or procedure is not experimental, is necessary and is superior to the procedure used before.