These contracts were designed initially to deal with the perceived stagnation of sales of PHI – now known as income protection insurance (IP). They were the creation of the marketing arm of the industry to generate sales – in itself not a bad thing and what marketing people are supposed to do anyway.
The problem was that there were insufficient statistics to allow for a truly scientific rating structure and this problem was exacerbated by a failure to define precisely what was meant by “critical”. At the beginning, sales were slow and there were disputes over precise meanings when claims were made. So, in order to kick-start sales and to make the product more attractive by persuading the buyer that this type of insurance was not ridden with claims escape clauses, cover was broadened without any increase in cost. In other words the contracts were driven on, not by a demand for the product, but a need to sell it.
Trying to draw an analogy between CI and life cover is difficult because the reasons for buying it cannot be the same. Everyone knows that they will die. It is just a question of when. Statistics abound to enable underwriters to rate each risk. The buyer takes out insurance against death and there can hardly be much argument as to what that means. If the buyer dies during the term the sum insured is paid – end of story. If he lives then all his premiums go into the pot to keep the costs down for the rest of his co-insured. Basic insurance. Life assurance allows the buyer to pay higher premiums to ensure that on survival of the term some, or all, premiums paid will be returned. (Bonuses are another issue better left for the moment!). Whatever, insureds gain nothing for themselves at the happening of the insured event, but could well benefit from its not happening.
Critical illness insurance provides lump sum benefits for events that are not inevitable nor is there any financial benefit from the contract for the insured if they do not occur. No-one can be sure they will get critically ill, whatever that may mean. The insurance is very much a gamble, but because so many illnesses, even when non-life threatening or non-disabling, are now covered, the dice is loaded heavily against the insurer. The only way to even up these odds is to increase premiums or reduce cover – or both. Dictionaries define “critical” in the case of illness as “marking the nature of a crisis”. Insurers are saying that they are paying claims when there is no crisis and they want to change that. Or otherwise they want more premiums.
Surely the fundamental reason for insuring against ill health is the need to obtain funds to get cured and to protect against lost income? PMI and IP are there, already, to do that. But both are not easy to sell and one does not reward the seller too well. Some of my IFA acquaintances are very successful in selling both but most put IP as the really critical cover for their clients.