Ashley Percival, CFP®
Critical illness insurance, otherwise known as critical illness cover or a dread disease policy, is an insurance product in which the insurer is contracted to typically make a lump sum cash payment if the policyholder is diagnosed with one of the specific illnesses on a predetermined list as part of an insurance policy.[i]
Critical illness cover was developed Dr Marius Barnard (Dr Marius), brother of the late heart transplant pioneer Dr Chris Barnard. According to Dr Marius, he was compelled to create a financial plan that acts as a financial doctor to assist patients in their overall recovery.[ii] In 1983, he persuaded a small South African life company to launch the first critical illness policy. Today, critical illness policies are used worldwide and are referred to as severe illness, critical illness or dread disease policies.
Despite the popularity of critical illness cover and its existence of more than three decades, many individuals falsely believe that medical schemes will provide for all their health-related expenses. The fact is that your scheme may not meet all your medical needs. The cost associated with severe illness can be substantial. You need severe illness cover to pay for things such as:
– Costs of the care and treatment not covered by your medical aid;
– Costs of recuperation aids;
– Replacing any lost income due to a decreasing ability to earn; or
– Funding for a change in lifestyle.
Does cover extend beyond age 65?
As a result of medical advances, you are now more likely to survive a major health crisis than to die from one. In other words, although you have been diagnosed with a dread disease, chances are good that you may still have a long life.
Whilst most insurers offer severe illness cover for the whole of your life, you usually need to be younger than 65 to take out the cover. As cost of cover increases as you get older, it makes sense to take out cover whole-of-life cover at a younger age.
It is important to consider the rate of increase of your premiums to ensure that your cover remains affordable. Should you for example select what is known as an age-related premium increase, your premium starts off relatively low, but it is likely to rise sharply in future.[iii] Depending on your circumstances, you might want to consider a level premium pattern where premiums remain stable over the long term or an annual fixed increase pattern (e.g. 5%).
Illustration of age-rated premium increase compared to level premium pattern
How much cover is adequate?
There is no simple answer to this question. Unlike life cover, disability cover and income protection which can each be calculated with reasonable accuracy, no standard formula exists for severe illness cover. Most applicants simply select as much cover as they can afford. That being said, you should at least consider the following factors when calculating the level and type of cover most appropriate to your needs:
– Whether or not you have medical aid;
– Your amount of disability cover;
– Family history of critical illness;
– Your age; and
– Your finances.
Duty to Disclose
An applicant for insurance has a duty to disclose all material in formation when applying for any type of risk cover (e.g. life, dread disease and disability), so that life companies can adequately assess and price the risk. The strict requirement for full and honest disclosure is a fundamental principle of insurance.
It is generally accepted that the applicant knows more about the risk to be insured than the insurer. For this reason, the law compels applicants to honestly disclose all information likely to influence the judgment of the insurer when determining appropriate policy terms and premiums.[iv]
Anti-selection and misrepresentation
In the event of material non-disclosure or misrepresentation, an insurer will be entitled to:
– Reject any current or future claims that are related to the non-disclosure or misrepresentation
– Adjust premiums from date of non-disclosure or misrepresentation
– Recover monies already paid for claims that relate to the non-disclosure or misrepresentation
– Cancel the benefit and/or policy with immediate effect. In this case, premiums less expenses should be refunded
– Offer to apply an exclusion where possible (e.g. depression or back disorder) and continue with the policy
When applying for critical illness cover disclose all material information (e.g. pre-existing conditions suffered from) to the insurer. Do not sign incomplete insurance application documents and make sure that all information contained in the application for cover is true and correct.
Your financial services provider should disclose all material terms and conditions of the policy to you. Any health loadings and exclusions should be brought to your attention.
Critical illness policies are not created equal. Shop around for cover that is most appropriate for your needs and circumstances.
[i] Woodfield, KR (2012).
[iv] Jargon buster Long-term insurance industry. https://www.asisa.org.za