Being diagnosed with a terminal illness is devastating, forcing people to make difficult decisions about how they want to spend the time they have left.
To reduce some of the potential financial strain, terminal illness benefit is included on many life and critical illness insurance products to provide policyholders with a payment to cope at such a difficult time. This type of cover is a relatively recent addition to the protection market, first appearing on policies in the late 1980s before becoming a standard feature in the following decade.
In order for a claim to be successful, insurers typically require a policyholder to have been diagnosed with a terminal illness that limits their life expectancy to 12 months or less.
As a result of improvements in detection, the number of people diagnosed with terminal illnesses has increased, making this benefit a particularly valuable option on life insurance. In support of this, Simon Jacobs, head of claims and underwriting at Aegon, says he has seen the percentage of claims for terminal illness increase steadily over the past five years.
“In 2016, 26 per cent of our life claims were for terminal illness, and I know the figure is even higher with other insurers,” Mr Jacobs explains. “As a benefit, it does work really well and awareness is definitely growing.”
Critical wording
While a valuable option on life insurance, its role on critical illness insurance has recently become less clear. This was highlighted in the Association of British Insurers’ (ABI) recent consultation on its Guide to Minimum Standards for Critical Illness Insurance.
Launched in November 2017, the guide seeks to set minimum standards in line with advances in the treatment and detection of conditions. This can make it easier for consumers and advisers to compare products.
Alongside proposals to exclude some early-stage cancers where five-year survival rates are virtually 100 per cent, it proposes that the model wording for terminal illness benefit should be removed from the minimum standards.
Currently, the model wording states that a terminal illness is where death is expected within 12 months, and where a definite diagnosis is given that the illness either has no known cure, or has progressed to the point where it cannot be cured and, in the attending consultant’s opinion, will lead to death within 12 months.
The ABI’s reasoning for its removal is straightforward. As insurers scarcely ever pay out a critical illness claim under the terminal illness definition, it serves as little more than window dressing.
This view is supported by Mr Jacobs. He says that as far as he is aware, his firm has never paid a single terminal illness claim on its critical illness policy. “A policyholder with a terminal illness would usually be able to claim under one of the other conditions included on a policy,” he says.
“As an example, the majority of terminal illness claims we pay on life insurance are for cancer or motor neurone disease, both of which are conditions on critical illness insurance.”
For or against
Although terminal illness is rarely used on critical illness insurance, the proposal to ditch the model wording has received a mixed reaction. Alan Lakey, managing director of CIExpert, is in favour of its removal. He says it should never have been considered as a condition as it is simply an accelerated death payment.
Mr Lakey adds: “The industry has got itself into a bit of a tizzy about this. The only reason it became a model wording is because the ABI set a rule that it would look at anything offered by at least 75 per cent of insurers. It is not a critical illness and it should never have had a model wording.”
Unfortunately, removing it from the ABI’s model wordings may not be quite so simple. Ruth Gilbert, who heads up consultancy Insuring Change, says the protection industry risks further damage to public trust if it drops minimum standards for terminal illness claims, due to the high level of claims for it on life insurance.
In particular, she points to the small but growing part of the protection market that goes direct or unadvised. She adds that, to simplify products for the direct market, there may be a temptation to remove the terminal illness benefit altogether or adopt a more diluted wording.
Ms Gilbert explains: “Having model wordings helps reduce confusion with multiple versions. We should instead be improving it to help manage consumer expectations and ensure consistency in claims handling. Terminal illness is the second most frequent cause of claim for protection lump sums, the hardest to decide – apart from total permanent disability – and the most time critical and emotionally sensitive.”
The right model
Regardless of whether or not the ABI’s critical illness insurance minimum standards are the right place to set the model wording for terminal illness cover, there is certainly some room for improvement in the way this benefit is applied on life insurance.
Mr Jacobs says that confusion can arise as a result of a mismatch between medical and insurance language. “Our definition for terminal illness states that the claimant must have less than 12 months to live,” he says.
“Unfortunately, a doctor is much more likely to say someone is terminally ill without necessarily specifying a length of time. This can result in a terrible situation where you have to tell a customer that they are not terminally ill enough.”
To reduce the frustration that can be caused if a policyholder is told to come back when they reach the 12-month point, insurers are offering support to these people. For instance, once a policyholder notifies them that they have a terminal illness diagnosis, Aegon can stop collecting premiums, deducting any that are not paid from the sum insured. This reduces the risk that the policyholder cancels their cover.
Additionally, rather than require the policyholder to come back when they do have less than 12 months to live, the insurer can contact their consultant directly to stay informed about how their condition is progressing.
Language problems
A further area where more work may be required is raising awareness of the type of claim that qualifies for terminal illness. Mr Lakey explains: “People confuse terminal illness and critical illness, so you see claims submitted for a heart attack on a life insurance policy, even though the person is likely to make a full recovery.
“It is right that such a claim is turned down, but as these declines sometimes end up with the Financial Ombudsman Service, it is not good for the protection industry’s reputation.”
Rather than terminal illness, he believes a more descriptive label such as accelerated death benefit could help to put some distance between this benefit and critical illness insurance.
There is also plenty of debate in the industry about where the trigger point for a terminal illness payment should be set. While a life expectancy of 12 months is fairly standard, Mr Jacobs says there is room to move it either way.
“Whether you extended it to 18 months or reduced it to six months, you would probably find that fewer claims would be declined,” he adds. “It is important to make sure people understand what is covered and how this benefit works.”
Another option frequently discussed is switching from paying the full sum insured to making a partial payment when a terminal illness is diagnosed. This would mean money is available to support the policyholder during their last months, while also ensuring the bulk of the sum insured remains in place to provide for surviving family members.
As terminal illness claims become increasingly common on life insurance, it will be important for the protection industry to provide consumers with a clear definition to avoid any confusion.
Whether or not the ABI goes ahead with its proposals to remove the model wording from its minimum standards on critical illness insurance, having a definition and support that demonstrates the value terminal illness benefit delivers to consumers is essential.
BIG NUMBERS
36,814
Number of life insurance claims paid in 2016 (ABI)
£2.8bn
Amount paid out in life insurance claims in 2016 (ABI)
15,464
Number of critical illness insurance claims paid in 2016 (ABI)
£1.1bn
Amount paid out in critical illness claims in 2016 (ABI)
26%
Percentage of life insurance claims that were for terminal illness benefit in 2016 (Aegon)
