Question: when is a life insurance payout not a life insurance payout? Answer: when the policyholder is still alive.
In that case, the payout becomes something rather different, known as terminal illness cover.
Most policies now include terminal illness benefit, which pays a lump sum if the policyholder is clinically diagnosed as having less than 12 months to live. If death seems assured, so is the payout.
Terminal illness cover has a noble and practical aim, to help the policyholder plan their affairs and settle their estate in the final months before they die.
But it can also create anomalies, for example, what if terminal illness benefit is paid to somebody who is expected to die, but then recovers?
Also, if you are paying a tax-free lump sum to a policyholder who has fallen seriously ill, how does that differ to critical illness cover?
Many clients already confuse the two forms of protection, and this could only worsen the misunderstandings. This could be a growing problem as the number of successful terminal illness claims rises.
New figures show that Aegon UK paid 28% of life claims early under its terminal illness definition in 2015, with payouts totalling £26m to around 250 families. It paid 97% of all claims.
Dougy Grant, protection director at Aegon UK, says this compares to just 17% back in 2010, an increase of 11% in just five years.
“Other insurers say they have also experienced an increase in terminal claims volumes in recent years,” he says.
Advisers are partly responsible for the growth, as they have boosted awareness by bringing the terminal illness definition to the attention of clients, Aegon says.
Grant makes it clear that Aegon will only pay terminal illness benefit if the life assured is diagnosed with an incurable illness and is expected to live less than 12 months.
It works hard to make the claims process as smooth as possible, assigning a named assessor to each client, Grant says.
“They collect information during a tele-interview, and progress the claim without the claimant needing to fill in any forms,” Grant explains. “They immediately called the customer once the claim is finalised, there is no waiting to receive a letter.”
At such a sensitive time, claimants need a quick decision, Grant says.
“If someone only has a few months to live, the remaining time should be spent with their family, rather than chasing an insurance company for a decision,” he says.
There is growing industry concern over making early life payments given the possibility that the client may subsequently recover.
Peter Hamilton, head of retail propositions at insurer Zurich, says medical advances will intensify the problem. Rather than extending the term, Hamilton says there are good arguments to shorten it instead.
“Most medical professionals will find it hard to give a very accurate picture of life expectancy and the further out we go, the more challenging that prognosis becomes,” he says. “Only paying out where life expectancy is, say, six months or less would lead to fewer disputed claims.”
Zurich’s figures show that more than 30% of clients who have successfully claimed for a terminal illness are alive 12 months later, and 10% are still alive four years later.
Hamilton says: “The guitarist Wilko Johnson was diagnosed in January 2013 with late stage pancreatic cancer and elected not to receive any chemotherapy. Doctors had told him he had nine or 10 months to live. He is still rocking all over the world – you can see him supporting Status Quo on May 29 in Oxfordshire.”
Jackie Kerwood, claims philosophy and governance manager at Aviva Protection, says that both Aviva and Friends Life paid out 6% more terminal illness claims in 2015 than 2014, a trend that has been developing for several years.
A growing number of clients are using the payout to cover treatment costs and make adaptations for dealing with the illness, rather than the purpose for which it was originally designed, to put their financial affairs in order before they die. Kerwood says this is wrong.
“Using this money to live with the illness is not what the policy was designed for,” Kerwood says.
Medical advances, such as targeted therapies for cancer treatments, mean that customers can now live for several years after being diagnosed with a terminal illness, she says.
“An accelerated life insurance payment is not what they require,” she argues. “Instead, they need money to help them adapt to living with an illness, pay bills and sometimes pay for treatment. Critical illness cover or income protection would be far more beneficial in these circumstances.”
TERMINAL OR CRITICAL?
Customers are already confused over the difference between terminal illness benefit and critical illness cover, so insurers need to avoid muddying the waters.
Paul Roberts, head of protection at Old Mutual Wealth, says advisers have a key role to play here.
“While a terminal illness will almost always count as critical, a critical illness is, statistically, rarely terminal,” Roberts says. “Advisers should therefore talk to their clients about the need for individual critical illness cover as well.”
Tom Conner at Drewberry, the advisers, says confusion between terminal illness and critical illness happens all the time.
“When asking new clients if their existing policy contains critical illness cover a sizable proportion will say yes when in fact they were getting mixed up with terminal illness cover,” Conner says. “It is the adviser’s role to educate clients to avoid confusion.”
Jennifer Gilchrist, proposition lead, design, at Royal London, says the insurer has also seen a rise in the number of terminal illness claims.
“It now accounts for more than 20% of our claims, and anecdotally, we hear that this is a trend across the protection market,” Gilchrist says.
As claims grow, brokers need to have a conversation with clients about what terminal illness means, Gilchrist says.
“In the last ABI [Association of British Insurers] Statement of Best Practice extra wording was added to the terminal illness description to explain more fully what is covered,” she says. “This should help the consumer having a better understanding of what is and isn’t covered.”
The ABI says terminal illness should follow a definite diagnosis that the illness is expected to cause death within 12 months, has no known cure and has progressed to the point where it cannot be cured.
Terminal insurance policies vary little but there is one quirk: some insurers exclude claims made in the last 12 months of the policy term.
Gilchrist says: “Royal London doesn’t, because we prefer to provide terminal illness cover from when the policy starts right up to its end date.”
Drewberry’s Conner says this clause is unnecessary and hopes more insurers will scrap it.
“Aviva removed its 18-month terminal illness exclusion in 2013 and it makes sense for other insurers to follow suit,” he says.
Scott Cadger, head of underwriting and claims strategy at Scottish Widows, says terminal illness claims are likely to continue growing, given increased focus on customer vulnerability and improved screening for cancers in particular.
“Our data shows shows that 90% of terminal illness claims were for cancer in 2014,” Cadger says.
He believes advisers are largely behind the growth in terminal illness claims.
“There has been a definite shift in the way advisers talk about terminal illness, explaining policy options and benefits, and this has certainly contributed to claims growth,” Cadger says.
Cadger says advisers must also now discuss Lasting Power of Attorney with their clients, and not simply make will and trust recommendations.
Mark Dennison, principal at IFAs LightBlue UK, says terminal illness may be a delicate subject but brokers can still have a straightforward conversation with clients.
“It’s our job to explain the benefit of this feature and it has always been fairly simple since the cost is either negligible or nothing,” Dennison says.
He adds: “Explaining why tough decisions should be made as soon as possible and helping the client make those decisions is exactly what an adviser should be doing.”
Dennison says that this is an opportunity to add value.
“If all the adviser does is search a portal for the cheapest price it’s not a very different service to non-advised,” he continues.
This is particularly important when selling protection given its importance to family finances, Dennison says.
“If somebody goes down the non-advised route instead and makes a mistake, they or their family probably won’t know about it until they try to claim,” he says.
Damian O’Connor, managing director of advisers Roxburgh Financial Management, says insurer figures showing growth in the number of terminal illness claims is good news.
“This proves it is a benefit worth having,” he says.
But terminal illness benefit could prove problematic if it turns life insurance into something it was never designed to be. Life cover isn’t supposed to sustain the living, but to support the family of the deceased.