07. Critical illness insurance

Question 1

What is CIC?

Answer 1

It pays a cash lump sum following diagnosis of one of a number of specified critical illnesses.

Question 2

What are the main 3 critical illnesses that CIC pays out on?

Answer 2

• cancer
• heart attack
• stroke

Question 3

Someone under 65 is how many more times likely to suffer a CI than to die?

Answer 3

5 times

Question 4

What can be paid out if the CIs are less severe?

Answer 4

Reduced sums assured, potentially on a sliding scale of %s

Question 5

In 1999 the Association of British Insurers (ABI) issued guidance regarding critical illnesses. Why? [2]

Answer 5

• to improve consistency
• and help consumers compare products more easily

Question 6

Name 4 potential uses of a CIC payout.

Answer 6

• pay off mortgage
• adapt house depending on needs
• new car if required
• any other commitments e.g. school fees

Question 7

Most newer CIC policies have what kind of term?

Answer 7

A limited term e.g. 20, 25 or 30 years.

Question 8

When is CIC paid out under a combined LA & CIC?

Answer 8

Death or diagnosis or a CI, whichever comes sooner. Aka “accelerated death payment”

Question 9

How does a split benefit trust work?

Answer 9

Death benefit held in trust for beneficiaries &
critical illness benefit held for absolute benefit of insured person if there is a claim

Question 10

For standalone CIC policies (not relevant for combined CIC & LA policies), typically how long is the survival period?

Answer 10

14-30 days.

Question 11

Children’s cover is an underwriting-free ‘added value’ extra and usually pays out what? [2]

Answer 11

• a set amount e.g. £25k
• or a % of the sum assured with a limit of say 2 claims per policy and 1 claim per child

Question 12

What does life-cover buy back enable?

Answer 12

For a restricted form of life cover to be taken out without the need for further medical underwriting, which may be difficult to obtain after suffering a CI.

Question 13

What generally applies for WOP to kick in?

Answer 13

A deferred period.

Question 14

Where policies are set up on a joint-life basis, what do some insurers allow for?

Answer 14

The policy to be split in the event of a separation or divorce without the need for further underwriting on either party.

Question 15

What is total and permanent disability?

Answer 15

Effectively a catch-all for a condition for a condition that although not specifically covered, the standard of the insured’s life is so poor they can never live a normal life again.

Question 16

What are the 4 ABI possible definitions for total & permanent disability?

Answer 16

Unable to do:
- own occupation again
- suited occupation again
- 3 specified work tasks again
- look after oneself again (3 from list)

Question 17

When is terminal illness benefit paid out, and when is it usually not paid out?

Answer 17

• life expectancy < 12 months
• life expectancy 12 - 18 months

Question 18

List 6 typical conditions covered by CIC in addition to cancer, heart attack & stroke.

Answer 18

• loss of hearing, speech or sight
• coma (resulting in perm symptoms)
• dementia inc Alzheimers (pre age x)
• loss of hand or foot
• Parkinsons (pre age x)
• brain tumour
• motor neurone disease
• multiple sclerosis

Question 19

Who is the onus on to prove a CIC payout is due?

Answer 19

Policyholder

Question 20

Exclusions to payout are largely the same as for IP. Name 5.

Answer 20

• alcohol / drug misuse
• criminal activity
• hazardous activities
• going against medical instruction
• pregnancy
• war disabilities
• self-inflicted injury

Question 21

CIC underwriting focuses on morbidity. Name 5 important factors affecting premiums.

Answer 21

• age
• medical history of insured
• medical history of insured’s family
• lifestyle factors e.g. alcohol/smoking

Question 22

Why might a client choose reviewable over guaranteed premiums?

Answer 22

Cheaper.

Question 23

Name 3 things the insurer will check before payment of a claim.

Answer 23

• the diagnosed illness is covered by the policy
• it was not a pre-existing condition
• policyholder disclosed everything relevant at inception

Question 24

What happens if a qualifying misrepresentation was deliberate or reckless?

Answer 24

Insurer can void contract and retain premiums.

Question 25

What happens if a qualifying misrepresentation was careless? [2]

Answer 25

• if insurer would not have entered contract, can void contract but must return premiums
• if insurer would have accepted contract on different terms, can treat contract as if those terms applied i.e. reduce sum assured based on charge of higher premiums

Question 26

What is a benefit to an EEE of group CIC?

Answer 26

Reduced underwriting making it simpler to purchase.

Question 27

What is a benefit to an EER of group CIC?

Answer 27

Relatively inexpensive part of an EEE’s benefits package and is often seen as a high added value benefit.

Question 28

How are individual CIC benefits taxed?

Answer 28

Not a chargeable event so no income tax or CGT.

Question 29

What is a taxation risk for combined LA & CIC policies under split benefit trusts?

Answer 29

If 1st claim is for CI, money is returned to the policyholder and sits within their estate, IHT issue if they then die before money is spent.

Question 30

What happens when a Group CIC premium is paid for by the EER?

Answer 30

It is treated as a benefit in kind.

Question 31

Name 2 advantages and 3disadvantages of CIC.

Answer 31

+ can be used to pay off mortgage or make necessary amendments to home
+ can be used to do bucket list things
- expensive
- not guaranteed condition will be covered
- those with previous health issues may struggle to get cover

Question 32

CIC vs should IP should be seen as ____.

Answer 32

complementary rather than alternatives.

Question 33

How might IP & CIC be complementary?

Answer 33

If CIC was used to pay off mortgage, a reduced IP policy may be required to fund essential expenditure.

Question 34

Why is IP likely to be seem as higher priority for most people?

Answer 34

As it covers a lot more conditions such as back pain or mental illness.

Question 35

Name 5 adviser considerations when selecting a CIC policy.

Answer 35

• what total & permanent disability options apply?
• is there children’s cover?
• is there WOP?
• is there indexation?
• what is the survival period?
• should policy be set up as stand-alone or combined?
• should policy be set up joint or single life?
• should guaranteed or reviewable premiums be selected?
• claims-paying history of insurers

Question 36

Severity based cover is a prominent development in the world of CIC.

Name 2 advantages of it.

Answer 36

• it covers many more illnesses (paying out only a pre-specified proportion of the sum insured)
• it allows more than 1 claim if the illness is progressive