Critical illness insurance

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Critical illness insurance or critical illness cover is an insurance product, where the insurer is contracted to typically make a lump sum cash payment if the policyholder is diagnosed with one of the critical illnesses listed in the insurance policy.

The policy may also be structured to pay out regular income and the payout may also be on the policyholder undergoing a surgical procedure, for example, having a heart bypass operation.

The policy may require the policyholder to survive a minimum number of days (the survival period) from when the illness was first diagnosed. The survival period used varies from company to company, however, 28 days and 30 days are the most common survival periods used.

The contract terms contain specific rules that define when a diagnosis of a critical illness is considered valid. It may state that the diagnosis need be made by a physician who specialises in that illness or condition, or it may name specific tests, e.g. EKG changes of a myocardial infarction, that confirm the diagnosis.

In some markets, however, the definition of a claim for many of the diseases and conditions have become standardised, thus all insurers would use the same claims definition. The standardisation of the claims definitions may serve many purposes including increased clarity of cover for policyholders and greater comparability of policies from different life offices. For example, in the UK the Association of British Insurers (ABI) has issued a Statement of Best Practise which includes a number of standard definitions for common critical illnesses.

1 The First Critical Illness product
2 Conditions covered
3 Need for Critical Illness cover
4 World Markets
5 See also
6 References
7 External links

[edit] The First Critical Illness product

Critical illness insurance was founded by Dr Marius Barnard^[1], with the first critical illness product being launched on the 6th of October 1983 in South Africa, under the name dread disease insurance.

Since 1983, the cover has been accepted into many insurance markets around the world. Other names of the insurance cover include: serious illness insurance, crisis cash and living assurance.

[edit] Conditions covered

The schedule of insured illnesses varies between insurance companies. In 1983, four conditions was covered by the policy, i.e. heart attack, cancer, stroke and coronary artery by-pass surgery. Since then various conditions were added and now the most comprehensive coverage is offered by PruProtect with 154 illnesses covered. The next nearest is Bupa who offer 38 while Norwich Union offer the least with 26 illness covered. ^[2]

Examples of other conditions that might be covered include:

Alzheimer's disease
blindness
deafness
kidney failure
A major organ transplant
multiple sclerosis
HIV/AIDS contracted by blood transfusion or during an operation
Parkinson's disease
paralysis of limb
terminal illness

Due the fact that the incidence of a condition may decrease over time and both the diagnosis and treatment may improve over time, the financial need to cover some illnesses deemed critical a decade ago are no longer deemed necessary today. Likewise, some of the conditions covered today may no longer be needed a decade or so in the future.

The actual conditions covered depend on the market need for the cover, competition amongst insurers, as well as the policyholder's perceived value of the benefits offered. For these reasons conditions such as diabetes and rheumatoid arthritis, among others, may become the norm cover provided in the future.

[edit] Need for Critical Illness cover

Critical illness cover was originally sold with the intention of providing financial protection to individuals following the diagnosis or treatment of an illness deemed critical.

The finances received could be used to:

pay for the costs of the care and treatment;
pay for recuperation aids;
to pay debts off;
replace any lost income due to a decreasing ability to earn; or even
fund for a change in lifestyle.

The actual risks covered by some of the products sold can be significant. For example, in America, about 1.3 million new cancer cases are diagnosed each year, every 29 seconds someone suffers a coronary event and every 45 seconds someone suffers a stroke.^[3]^[4] In Canada, more people will experience a critical illness before they reach 75, than will die before that age.^[5] In the United Kingdom, 1 in 5 men and 1 in 6 women will experience a critical illness before their normal retirement age.^[6]

However, some conditions covered may be purchased to give the policyholder a 'peace of mind' rather than actually meet any need or cover any major risks. An example of this is the coverage of Creutzfeldt Jakob Disease (CJD) in the UK, which generally has a very low incidence rate, but generally is valued by people due to the potential high media coverage of the cases. Thus, the fear of contracting such a disease may be disproportionate to the actual risk, which means the cover does not meet the policyholder's needs appropriately.

Critical illness may be purchased by individuals in conjunction with a life insurance or term assurance policy at the time of a residential purchase, known as a 'bolt-on' benefit. The reason for this is to provide financial protection to the policyholder or their dependants on the repayment of a mortgage due to the policyholder contracting a critical illness condition or on the death of the policyholder. In this type of product design, some insurers may choose to structure the product to repay a portion of the outstanding mortgage debt on the contracting of a critical illness, whilst the full outstanding mortgage debt would be repaid on the death of the policyholder. Alternatively, the full sum assured may be paid on diagnosis of the critical illness, but then no further payment is made on death, effectively making the critical illness payment an 'accelerated death payment'.

Some employers may also take out critical illness insurance for their employees. This contract would be in the form of a group contract and has become an essential strategy used by employers around the world to both protect their employees financially as well as attract more employees to consider working for the company.

[edit] World Markets

In South Africa, the UK, Ireland, Australia and New Zealand, critical illness insurance has become a well established form of insurance.

Critical illness insurance continues to grow in popularity and has recently been accepted into other territories including the far east and the United States.

In markets, where the product is newer, many insurers choose to use the expertise of reinsurers with worldwide exposure as well as overseas insurers whom have sold the product for a number of years. The expertise may come in the form of data provided as well as assistance with the product design features of the product.

Critical illness insurance seems to have developed into an essential insurance policy, which many individuals around the world consider to be a worthwhile purchase.