A bit like the curate’s egg, this new millennium – good in parts. Life expectancy is increasing, and the age to which people remain active is increasing. But the good news does not apply to everyone. A quarter of us will suffer a critical illness (CI) before age 65. And, of those who survive, many will linger in an impaired condition for a long time afterwards.
This implies a need for income. Lynda Cox, Skandia Life’s marketing manager, comments: “One of the things we’re seeing is that critical illness cover becomes long-term care (LTC).
When you’re aged 60-65 you’ll not need a large lump sum, you’ll want a regular income to pay for LTC in your home or elsewhere.”
Under Skandia’s Lifetime plan, the total permanent disability benefit changes at age 60. Until then, it is based on inability to perform own occupation. Afterwards, it becomes loss of independent existence cover. The policy pays out when the insured has, for three months, been unable to do three out of six activities of daily living (ADLs).
Skandia previously insisted on four ADL failures, but this was changed last September. Other improvements were made to the plan at the same time, and as usual, Skandia applied them retrospectively to its existing policies. The Lifetime plan has another twist. If policyholders are not working fulltime when they claim, their permanent total disability (PTD) benefit is assessed on ability to perform six working age activities. As with ADLs, the claim trigger is failure to perform three activities.
The first three of these tasks are similar to ADLs, namely transference and mobility, dressing, and eating. The other three relate to participation in society. They are: recognising money and its value and making purchases, independently arranging to see a doctor, and answering the telephone and taking a message for someone. This transition particularly affects policyholders whose career takes a dramatic turn. They may have retired early but still do part-time consultancy work. They can make a claim if they are not doing more than 16 hours a week gainful employment. Or they may have been made redundant and still be jobless six months later.
Skandia does not have to be informed if a policyholder stops working full-time. But, until that moment, change of employment must be notified in writing. Within 30 days. Skandia needs to know, in order to decide whether to continue offering PTD, and on what terms. While it would not be picky over slightly late notification, it would be twitchy if the deadline had passed 11 months ago.
It is important for IFAs to emphasise this fact to clients. If someone is sacked and then finds a new job, the last thing on their mind will be telling their CI insurer about it. Insurers send reminders to both IFA and policyholder, and the change should be picked up at the IFA’s annual review, but by then it could be too late. The PTD cover may no longer be in force.
Usually, when people change jobs in mid-life, they move to a more sedentary occupation. But not always. A friend of mine became so stressed as a physics teacher that he took early retirement at 50. He now works as a painter and decorator. Cox says Skandia rarely alters people’s cover when they advise a change of occupation. But in this case they would definitely rate him up.
Some other Cl providers take a similarly stringent underwriting approach. But not Pegasus. It underwrites occupation on a permanent basis. What the Pegasus client does at outset holds good for the full duration of the contract.
The same goes for Scottish Provident. Its marketing manager, Roger Edwards, explains: “People don’t remember to advise their insurer when they change occupation. Technically, if they claim, the insurer could pay a reduced benefit. We asked ourselves, why have we got these clauses? Is there an actuarial reason? It wasn’t justified, so we dropped them.”
Advisers will be pressing for other insurers to follow suit. And it would be nice to see cuts in the number of ADLs or work tasks that must be failed before a claim can succeed. Some insurers still insist on four failures. Others are satisfied with two. As you have to be pretty disabled to fail four activities, there is certainly scope for improvement here.
At the moment, the transition from CI to LTC is not seamless. Even Scottish Provident’s Self Assurance, probably the most flexible protection policy in the market, does not provide full adaptability. Edwards comments: “The facility to add in LTC is not available on our Self Assurance menu yet. But it appeals to me quite a lot. Obviously it would have to be researched with customers first.”
Other product features will also demand a rethink as the pattern of working life changes. Premium waiver benefit finishes at age 60 or 65, regardless of whether the insured is still working.
Unfortunately, a lot of clients have had to put back their intended retirement age. They may have remarried and have a relatively young second family. Education fees may well continue until the father is in his 70s. Not to mention mortgage repayments.
Yet there are reasons why the transfer from own occupation PTD to ADL based cover is fixed under many CI contracts. Cox says: “It’s very difficult to cost the benefit at, say age 68. The boundary becomes blurred between disability and the normal ageing process.”
Insurers now have up to 14 years’ claims experience of CI. They are seeing that more customers survive a critical illness than was expected. This has led them to think, what happens next? Having received one payout, claimants will be receptive to being sold more cover.
A number of offices now offer buyback of life cover, but Pegasus is the only one so far to offer more CI. One year after a claim, the customer can be covered for 35 per cent of the amount paid out. There is an annual conversion fee of £25. But only three conditions are covered – heart attack, cancer and stroke.
To take this option costs 4.5 per cent of the premium for plans with life cover and six per cent for standalone plans. The option must be taken at outset. The way it works is as follows. Say a policyholder buys a policy with £50,000 of cover. By the time of the claim, it has risen to £70,000 through indexation. The amount of cover the policyholder gets on conversion is 35 per cent of £70,000, regardless of age or state of health. Cover lasts for a five year term only.
Nick Kirwan, product development manager at Pegasus, comments: “If people have the cover, they don’t need to be so cautious about spending their CI payout. And if they have six years clear after, say cancer, they may be insurable again.”
The option was introduced last July. Since then, business volume has gone through the roof, according to Pegasus. Of all applications in the last six months, 38 per cent have chosen the option. Starting from a nil base, this represents a very high take-up rate.
Kirwan adds: “We encourage IFAs to sell it as part of the plan. We’ve priced it to the bone, so that it’s only a few pounds extra a month. We put it on all our quotes, and we did consider making it automatic. But it pushes the price of everyone’s cover up, which may make you look uncompetitive on the Common Trading Platform.”
CI is still a young market. And as half of sales are mortgage-related, new customers are young too. Average age at outset is around 33. Many policyholders may however be basking in a false sense of security.
IFA John Joseph warns: “Any body who’s taken CI to cover a mortgage shouldn’t perceive that it covers them for anything else. They don’t have the full-blooded product. I liken it to people who take out an endowment to cover a mortgage. They’re not walking around with protection, they’re carrying an insured debt.”
He adds: “Those interested in protection will go to an IFA for a rounded approach. They should go for a whole-life CI policy, on a maximum or standard allocation basis – it’s up to the client and adviser. They can transfer it into LTC at a later point.”
Most insurers see the two covers as distinct entities. David Czerwinski, propositions manager, life, at Norwich Union, says: “CI is a core product for people in their 30s. LTC is a separate market, done by very few IFAs. You’re talking to different age groups. In the USA, they’re selling LTC into the 50s and 40s but not here.”
Brokers confirm that clients are looking no further forward than the end of their mortgage or planned retirement date.
One IFA, who preferred not to be named, commented: “Someone 30 years old has a list of immediate priorities. We’ll pick up the LTC need later on. Where I have a bigger problem is life cover, CI and income protection which all overlap, but there’s not a single product that meets all the needs.”
But perhaps as the statistics on contracting, and surviving, critical illnesses continue to stack up, insurers will be forced to design products which truly cover all possibilities.