Critical illness cover looks simple. A client is diagnosed with something serious and a tax free lump sum is paid. The exam is not interested in that summary. It wants to know whether the specific facts in front of you meet a policy definition, and that is where the marks are.
Definitions do the work
A critical illness policy pays on diagnosis of a listed condition that meets the policy wording, not on being seriously ill. The ABI Statement of Best Practice provides model wordings so that products can be compared, and it requires clear disclosure of what is and is not covered.
The three conditions that generate most claims all carry severity thresholds:
- Cancer of specified severity, excluding many early stage, non invasive and localised cancers
- Heart attack of specified severity, evidenced by defined changes in cardiac markers and clinical findings
- Stroke of specified severity, requiring symptoms that persist beyond a defined period and evidence of damage
Beyond that core, insurers add conditions such as multiple sclerosis, kidney failure, major organ transplant, benign brain tumour, coma, blindness and deafness. A long list is not automatically better cover. A shorter list with more generous severity thresholds can pay more claims than a longer list with strict wordings.
Total permanent disability
TPD is the definition that varies most, and it is a favourite exam target.
| Basis | Test applied |
|---|---|
| Own occupation | Permanently unable to do the specific job held |
| Suited occupation | Permanently unable to do any job suited by training or experience |
| Any occupation | Permanently unable to do any paid work |
| Activities of daily living | Permanently unable to perform a set number of activities such as washing, dressing, feeding, transferring, continence |
The word permanent is doing a lot of work. A serious but recoverable condition will not meet a permanence test, which is exactly why income protection sits alongside critical illness rather than being replaced by it.
Severity based and partial payments
Modern policies pay graded amounts. A defined percentage of the sum assured is paid for less severe conditions, often with a monetary cap, and the full sum assured remains available for a later qualifying claim. Advisers need to explain three things: the percentage, whether the main sum assured reduces, and whether the premium reduces after a partial claim.
The features that come up in questions
- Children cover, usually included up to a capped amount, with a defined age range and often excluding congenital conditions and conditions present at birth
- Survival period, commonly between ten and thirty days, during which the life assured must survive after diagnosis
- Life cover included, so the policy pays on death or earlier critical illness, compared with a standalone version that pays only on critical illness
- Guaranteed insurability options, allowing an increase in cover on marriage, birth or a mortgage increase without further underwriting
- Reviewable premiums, which look cheaper at outset and carry the risk of increases later
- Indexation, keeping the sum assured in line with prices
Taxation and trusts
Proceeds are paid free of income tax and capital gains tax. Where the policy includes life cover and is not written in trust, the death benefit forms part of the estate for inheritance tax, so writing it in trust keeps it outside and speeds payment. For a joint mortgage, first event cover written on a joint life basis pays once, while two single life policies in trust for each other provide more flexibility and two potential claims.
Why claims get declined
The industry pays the large majority of claims, and the reasons for the remainder are examinable:
- The condition does not meet the severity wording
- The condition is not a listed condition
- A policy exclusion applies, for example a pre existing condition
- The applicant failed to make a fair presentation of the risk
Under the Consumer Insurance (Disclosure and Representations) Act 2012 the consumer duty is to take reasonable care not to make a misrepresentation. The insurer remedy then depends on whether the misrepresentation was deliberate or reckless, in which case the claim can be refused and premiums kept, or careless, in which case the remedy is proportionate and may mean a reduced payment or an amended policy.
What to write in an answer
Name the condition, quote the test in the wording, apply the client facts to the test, then state whether the claim is payable and why. That four step answer is worth far more than a general statement that critical illness cover pays a lump sum on serious illness.