Chapter 7 - Critical Illness

Question 1

How would you define Critical Illness cover?

Answer 1

A long term insurance policy which pays a tax free lump sum on diagnosis of a specified critical illness

Question 2

Is the payment from a Critical Illness taxable or tax free?

Answer 2

Tax free

Question 3

Why would it not be recommended for an adviser to re-broke a Critical Illness policy?

Answer 3

As older policies typically covered more illnesses.

With a newer policy there is a risk you will not be covered for something which you were covered for on your old policy.

Question 4

Name 3 common uses for a Critical Illness policy?

Answer 4

Any 3 of the following;

• Pay off debts – mortgage
• Adaption’s to the home
• Adaption’s to car
• Any other financial commitments that can no longer be met
• Payment of private medical care

Question 5

When taking out a Life Assurance policy with in built Critical Illness why is it important to use a split trust?

Answer 5

A split trust should be used to split the potential death and critical illness benefits.

If premature death occurs then the death benefit should be paid out in trust (out of the estate and probate) to the beneficiaries.

If a critical illness occurs then the policy should pay out for the use of the insured.

Question 6

Name 2 options that can be built into a Critical Illness plan

Answer 6

any 2 of the following;

• Children’s cover
• Index linking
• Life cover buy back
• Waiver of premium
• Disability

Question 7

What is a survival period on a Critical Illness policy?

Answer 7

After diagnosis the insured must survive for a set period of time, typically between 14 and 30 days.

Question 8

What is children’s cover on a Critical Illness policy?

Answer 8

Pays out an additional sum assured if the child of the insured becomes critically ill. Usual max £25k pay out or a % of sum assured.

Question 9

On a Critical Illness policy what is life cover buy back?

Answer 9

It is for combined policies, allows buy back of life cover after a pay out for CIC as the CI may mean life cover is still needed but not available elsewhere.

Question 10

What are the 5 definitions of disability on a Critical Illness policy?

Answer 10

o Unable to do ones own occupation ever again
o Unable to do a suited occupation ever again
o Unable to do any occupation ever again
o Unable to do 3 specified work tasks
o Unable to look after oneself ever again

Question 11

Who is the onus on the prove that a claim is payable?

Answer 11

The policyholder

Question 12

What are the common exclusions for Critical Illness policies?

Answer 12

• Drugs and alcohol
• Criminal act
• Flying
• Dangerous sports
• AIDS or HIV (unless blood transfusion)
• Self-inflicted
• Failure to follow medical advice
• Pregnancy
• Living abroad (out of the free zone)
• War

Question 13

Are Critical Illness policies based on morbidity or mortality?

Answer 13

Morbidity

Question 14

The main underwriting considerations for Critical Illness policies are?

Answer 14

• Age
• Medical history
• History of family
• Lifestyle (drinking, smoking etc)

Question 15

In respect to Critical Illness policies what is the difference between guaranteed and reviewable premiums?

Answer 15

The premium on a guaranteed policy is the same throughout the term “guaranteed to pay this premium”

A reviewable policy may start out cheaper but could increase at the review point which is typically every 5 years

Question 16

What is the increase in premiums dependant on for reviewable Critical Illness policies?

Answer 16

It could be dependant on the claims record of the life office, or advances in medical science. Not necessarily the health of the insured.

Question 17

As a member of a group Critical Illness scheme your employer pays the premiums. How is this taxed?

Answer 17

The premiums are taxed on the employee as a benefit in kind