Terminal terminology: The latest protection shake-up

Terminal terminology: The latest protection shake-up

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.

Article continues after advert

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.”