Chapter 7 - (6 exam questions) Critical Illness Cover - CIC

Question 1

What is Critical Illness Cover?

Are there any restrictions on what the benefits are used for? Ie, do policies require that they pay off debts first

The list and range of conditions covered as well as definitions of illness used to vary greatly between insurers. This was confusing for consumers. What was introduced to tackle this issue?

What happens to the policy once a successful claim is made?

Answer 1

CIC is an insurance policy that pays a TAX-FREE cash lump sum if the policyholder contracts any one of several specified illnesses.

There are no restrictions on how the lump sum is used (E.g, to pay off a mortgage or do ‘bucket list’ activities

A ‘Statement of Best Practice’ for all CIC providers was introduced. It made all CIC policies contain a number of specific conditions as a minimum. E.G heart attacks, cancer etc. (this meant that consumers knew to a minimum what they’d be covered against)

Once this payment is made, the policy stops. (this contrasts with IPI). Combined CIC policies can have ‘buy back options’. These policies are known as Life Cover Buy Back

Question 2

Can CIC only be set up on a sole basis?

Answer 2

It can be set up on a single or joint-life, first-event basis, so no.

Question 3

What are the different types of CIC policy?

Answer 3

Standalone

Combined

Life Cover Buy Back

Group Schemes

Question 4

The 4 types of CIC are:

Standalone

Combined

Life Cover Buy Back

Group Schemes

Tell me about the first two

Answer 4

Standalone - No life cover. OFTEN unit linked

Combined - Combined with life cover. In combined policies the CIC cover benefit is known as ‘accelerated death benefit’

Question 5

The 4 types of CIC are:

Standalone

Combined

Life Cover Buy Back

Group Schemes

Tell me about the last 2

Answer 5

Life Cover Buy Back - A combined policy with a buy back option.

People can survive following a critical illness diagnosis. This allows the life-cover element to be bought back within a certain time period (Remember, whenever a claim on a CIC policy is made, the policy ceases so If they didn’t have this buy back option it would mean that the person has no protection if they survive following their diagnosis

Group Schemes -
Employer cover for employee. No underwriting. Usually has A 30day survival period

Question 6

Before a buy back option can be exercised on a combined CIC policy, there must have been a critical illness payment made on the policy in the first place. True or false

Answer 6

True

A buy back option renews the life assurance element of the combined policy after a claim a has been made. This can be very beneficial because people can survive following a critical illness diagnosis. Whenever a claim on a CIC policy is made, the policy ceases. Therefore, if there was no buy back option it would mean that the person has no protection if they were to survive following their critical illness diagnosis. It is doubly as good in this respect because it can be very difficult for those who have had a previous claim on a policy to find new insurance as most providers will deem them too risky

Question 7

What factor should clients who are looking at replace an existing CIC policy with a new one greatly consider

Answer 7

Once a policy is issued, its definitions of illness/what it covers will remain the same for the life of the policy. As medical science continues to uncover new diagnostic techniques, many critical illnesses will be detected earlier. This has led to constant changes in the definition of critical illnesses covered.

Therefore their old policy may cover them better than any new ones that they could take out

Question 8

The conditions covered can be changed by a provider, but not retrospectively

What does this mean?

Answer 8

if you have taken out a CIC policy, you will be covered for the conditions defined in your contract at the point of application. If the insurer subsequently changes their policy terms and conditions this will not relate to you and your cover, as you have a contract on those previous terms.

This must be taken into consideration when someone is looking to replace their CIC with a new policy

Question 9

Summary of CIC

Answer 9

Question 10

What is a CIC survival period?

Answer 10

It is a period that the policyholder must survive post-diagnosis before any benefit will be paid

This will vary but could be from 14 through to 30 days. If the policyholder dies within this period, no CIC payment will be made.

Question 11

CIC in context

Answer 11

Question 12

What are some of the main additional features that can be added onto a CIC policy

Answer 12

Question 13

How does Waiver Of Premiums on CIC work?

Answer 13

If the individual is ill or disabled this feature it allows the individual to waiver the premiums after an initial period, usually the first six months

NOTE: The initial illness may not be severe enough to warrant a claim on the CIC policy but the individual wishes to ensure the premiums are paid

Under WOP, premium payments will continue until the individual recovers, the policy ends, or a CIC claim is made.

Question 14

An additional feature of CIC is ‘increasing cover’

This is a form of ‘guaranteed insurability’. Why?

What is the variation of this feature known as?

Answer 14

It gives policyholder a guaranteed increase in their cover without underwriting. Ie it increases cover regardless of any deterioration in health

Therefore known as guaranteed insurability.

There is also a variation on automatic benefit increases often known as ‘special events’ increases.

Question 15

One feature of CIC is children’s cover. What is this?

Answer 15

Offers an additional critical illness payment, if one of the children of the policyholder is diagnosed with a specified illness, and lives for the required survival period.

This payment will be a smaller payment than the main cover amount, for example £25,000, and will not affect the main cover in any way.

Question 16

One additional feature of CIC is Total and permanent disability (TPD)

What is this?

Answer 16

CIC will payout if policyholder life becomes extremely poor

Payout occurs if they cannot achieve 5 ABI definitions as chosen by insurer (similar to IPI ‘incapacity’ definitions)

1) Own

2) Any

3) suited.

4) Unable to carry out three specified work tasks ever again such as walking, lifting, and writing.

5) Unable to look after oneself ever again. (most stringent/difficult to claim) - worked out by assessing a number of things such as the persons ability to wash themself or feed oneself etc

Question 17

What is terminal illness benefit?

Answer 17

allows the sum assured to be paid whilst the life assured is still alive but has a life expectancy of less than 12 months. Medical evidence must be shown before any claim can be made

Question 18

An additional feature of CIC is Separation and reinstatement. What is this?

Answer 18

This option allows for joint life policies to be split and then reinstated as single life policies, where a relationship breaks down.

This reinstatement is not subject to medical underwriting.

Question 19

Summary

Answer 19

Question 20

Answer 20

Question 21

Question

Answer 21

Question 22

Like IPI, in CIC policies gender cannot be a factor to calculate premiums. true or false

Answer 22

True

This is the same for all insurance polices

Question 23

There are 2 premium choices with CIC policies. What are they?

Answer 23

Guaranteed
Premiums remain the same throughout the life of the policy but are higher right from the start.

Reviewable
Premiums are lower to start off with but, after the first policy review 5-10 years later, are likely to either have to increase to maintain the same cover, or cover levels will need to decrease if higher premiums are unaffordable

Question 24

Similar to IPI, why should the individual notify their insurer as soon as possible. For IPI this is so the deferral period begins to count down asap

Answer 24

For CIC the insurer should be notified asap so the survival period begins to count down asap

The insurer also requires medical evidence

Question 25

No CIC benefit payment will be made until medical evidence has been received and the survival period has elapsed. True or false

Why do insurers want medical evidence?

Answer 25

True

They use the medical evidence to check the validity of the claim and to ensure that the condition that the claim is due to is not one that is excluded or was not disclosed at point of application.

Question 26

What is the taxation of benefit payments of CIC? Also mention group schemes

Answer 26

Individuals are paid a tax-free cash lump sum.

Employer-sponsored schemes have several key rules with regard to taxation:

Premiums paid by an employer can be offset against profits as allowable business expenses.

Premiums are treated as a benefit in kind for employees, therefore increasing any income tax liability.

Benefits are paid to the employee as a tax-free cash lump sum.

Question 27

A split trust is often used for combined CIC policies. What is this and why?

Why are trusts not used for standalone polices?

Answer 27

Standalone CIC policies have no need of trusts as the proceeds will be used to benefit the policyholder.

Where a policy has both life and critical illness cover a split trust is sometimes used where the life cover element is in trust, but the critical illness benefit is not.

This means that the life cover element has the benefits of being in trust in terms of estate planning and the critical illness element is still accessible to the claimant.
If the Critical illness element was in trust too the individual will not be able to access the CIC lump sum even if they are still alive and want to use it.

The downside of this is that when a critical illness benefit is paid to an individual as part of this arrangement, they may not have enough time to spend it, and, on their death, it is left in the estate. This would therefore increase the estate value and any potential IHT due so whether you use a split trust or not needs to be assessed in detail

Question 28

Summary of the underwriting and claims process for CIC

Answer 28

Question 29

What are the advantages of CIC?

Answer 29

providing a tax-free cash lump sum directly into the hands of the policyholder

no restrictions on how it is used

mortgages and debts could be repaid
a home could be adapted

private medical treatment could be paid for a ‘bucket list’ could be worked through

Question 30

Disadvantages of CIC?

Answer 30

expensive premiums, especially for individuals who constitute a higher risk

higher risk of declination for individuals with a poor family history

high risk of policy exclusions, which will mean the cover is of less value

no guarantee of a pay-out even if one of the conditions covered is contracted

Question 31

Jeff has a CIC policy that includes terminal illness benefit. The difference between these two benefit types is…

the former pays out if life expectancy reduces, the latter if a serious illness is contracted.

both pay out due to reduced life expectancy.

the latter pays out if life expectancy reduces, the former if a serious illness is contracted.

both pay out if a serious illness in contracted.

Answer 31

the latter pays out if life expectancy reduces, the former if a serious illness is contracted.

Terminal illness benefit will be paid if life expectancy reduces, usually below 12 months. CIC cover will pay out a tax-free lump sum if a serious illness is contracted.

Question 32

Zoe has a buy-back facility on a policy she has made a CIC claim on. What is the other element of this policy?

Personal accident and sickness cover.

Life assurance cover.

Private medical cover.

Hospital cover.

Answer 32

Life assurance cover.

A buy-back facility allows the policyholder to buy-back life cover, without health evidence, and is ONLY available on plans that combine life assurance with CIC.

Question 33

Ashley and Gareth are married and have taken out joint-life cover with CIC for a sum assured of £100,000. If Gareth claims £100,000 CIC, what will happen to the policy?

Ashley can claim CIC of £50,000.

Ashley can claim CIC of £100,000.

The policy will cease.

Gareth can claim £100,000 if Ashley dies.

Answer 33

The policy will cease.

With a joint CIC and life cover policy, there will only be one payment. If this instance, Gareth has been paid a CIC benefit, therefore the policy will cease. (If they have a buy back option they could potentially renew the life assurance element)

Question 34

Jackie has a unit-linked universal whole of life CIC policy. The charges deducted from her policy will cover…

mortality costs.

morbidity costs.

both mortality and morbidity costs.

neither mortality nor morbidity costs.

Answer 34

both mortality and morbidity costs.

Both mortality and morbidity charges will be deducted, as universal policies would provide both life and critical illness cover.

Question 35

Frank took out a unit linked CIC policy three years ago for £200,000. He recently had a serious heart attack and died five days later. His CIC policy will pay out…

the full £200,000 sum assured.

the premiums Frank paid less income tax.

any surrender value that has built up.

the premiums paid without any tax deductions

Answer 35

any surrender value that has built up.

Frank’s policy does not cover him for death. He has not lived for the required survival period. Any surrender value will be paid out, if some has built up within his unit linked policy. Surivial periods are anywhere from 14days to 30days

Question 36

Paul is considering adding critical illness protection onto a life policy he is just about to put on risk. Which of the following policy types is CIC most likely to be added on to?

Term assurance only

Term assurance and whole of life.

Endowment assurance and whole of life.

Whole of life and IPI.

Answer 36

Term assurance and whole of life.

Critical illness cover is most likely to be included on a term or WOL policy as an additional benefit.

Question 37

Sam, an additional rate taxpayer, has received a £100,000 lump sum from his critical illness policy. What would his grossed up original lump sum payment have been?

£100,000.

£125,000.

£150,000.

£175,000.

Answer 37

£100,000.

Payments from an individual’s own critical illness policy such as Sam’s, are tax-free. Therefore His grossed up payment will be the same as the payment he received - £100,000.

Question 38

Jack is married to Samira. He has taken out a combined life assurance and critical illness policy subject to a split trust. A critical illness cover claim would be…

split equally between Jack and Samira.

paid to trust trustees.

paid to Jack.

split equally between Jack and the trustees.

Answer 38

paid to Jack.

With a split trust any critical illness claim is paid to the policy assured (Jack), and any life cover claim is paid into the trust