Pros and cons of different types of CI payouts

The cost of critical illness cover is substantially higher then life assurance because Mr Lakey says it is far more likely that a CI claim will eventuate than premature death.

By including ‘partial’ or ‘additional’ cover, Georgina Shield, senior product manager of insurance at Legal & General, says customers can be covered for conditions that may not be offered by other providers.

The downside of ‘partial’ payments is that these reduce the overall amount of cover, Ms Shield points out.

For example, she says if a customer meets the definition for a condition that pays out 25 per cent of the total amount of cover, they will only have 75 per cent of their original amount of cover remaining.

In this scenario, Ms Shield says if the policy is mortgage related the customer could be under insured if they came to claim on the remaining 75 per cent.

Most providers offer ‘additional’ cover payments as opposed to ‘partial’ cover payments, Ms Shield points out, which do not reduce the total amount of cover.

So in this example, if a customer claimed on an ‘additional’ cover payment that pays 25 per cent of the total amount of cover, Ms Shield says they would still have 100 per cent of the original amount of cover available in the event of a claim.

Ms Shield says: “‘Partial’ and ‘additional’ cover payments may not meet the original need of the policy.

“They supply extra cover that the customer can use to help them get better or for other reasons, but the original need for cover (mortgage, family and business protection purposes) may not been fulfilled.”

Chris McNab, critical illness product manager at LV, agrees it is important that advisers check the partial payments cover.

But Mr McNab says partial payments are good news for customers as claims can now be made for conditions which are not covered under a full payment.

However he notes there are some arguments from the industry that the introduction of partial payments over complicates critical illness and hence makes it more difficult for advisers to sell the product.

However Mr McNab says the aim of these payments is to make cover more meaningful and to provide even more clients with financial support when they need it most.

What are the different payments that can be made by a CI policy?

In most cases, critical illness insurance pays out a lump sum benefit.

More than 75 per cent of critical illness insurance is written as an accelerated benefit on a life assurance contract, according to Ben Heffer, insight analyst for life and protection at Defaqto.

An accelerated benefit means the policy pays out either on death within the term or earlier critical illness.

Some policies can be set up on a family income benefit basis so that the benefit is paid out in installments to emulate the claimant’s continuing income.

Most policies today include an element of severity-based critical illness, Mr Heffer says.

Severity-based is where a lower pay-out is made for a less severe diagnosis.

Mr Heffer says this is principally associated with less severe cancer, for example, carcinoma in situ of the breast tissue or low grade prostate cancer.

He says these do not warrant a full pay-out but nevertheless there may be a financial need to be addressed.

In its latest statement of best practice, Mr Heffer says the ABI makes the distinction between policies where severity-based cover gives rise to an additional payment (i.e. a rider benefit in addition to the sum assured) and partial payments, which reduce the remaining cover.

Mr Heffer says a lump sum payment is suitable for debt protection, for example, to pay off a mortgage; a regular payment is suitable in lifestyle protection, where the intention is to provide an ongoing income, perhaps to cover school fees, for example.

In terms of severity-based payments, where these are written on an additional basis Mr Heffer says they provide a useful extra benefit, however, where they are written on a partial basis, he warns people should be aware that their remaining cover amount will be lower.

Mr Heffer says PruProtect’s serious illness cover pays out varying percentages of the sum assured depending upon the severity of the condition for multiple claims.

He says the likelihood is that more claims will be paid under this contract than a traditional one but the size of the pay-out may not be as great.