Protection policies analysed in BCP study

Serious illness policies are one of the most popular protection contracts on the market today. But whether you should take out such a policy, instead of the more conventional income protection one like permanent health insurance (PHI), is a question many are asking. The life and pensions division of BCP Stockbrokers has just released the results of its study into the relative merits of serious illness and income protection policies including type of cover, costs and respective claims history.

Income protection policies pay the holder a regular income (limited to 75 per cent of total income) if someone is unable to work, which tops-up any social welfare benefits. Benefits are taxable but can last until you retire or die.

Serious illness insurance, on the other hand, pays out a tax-free lump sum upon diagnosis of one of the serious/critical illnesses listed. Most claims are for illnesses like cancer, heart attack, stroke, diabetes, multiple sclerosis etc, but most of the dozen or so companies which sell this kind of cover include many more illnesses and conditions, including, in some cases, CJD and HIV, the latter only if it is contracted accidentally or as a result of employment in the medical or security fields. The BCP results include some interesting findings: serious illness is the more popular form of cover with approximately 42,000 policies written annually; a typical serious illness claim arises from individuals aged 40-45 and pays out £40,000 tax free; the level of initial medical vetting is greater for income protection than for serious illness cover. This, says BCP, is understandable given that an income protection claim could lead to a payout of £40,000 annually for 25 years, i.e. a total of £1 million. Serious illness claims are once-off and average at £40,000; the most frequent cause of a serious illness claim is cancer, while for income-protection policies it is depression; fewer than one in 10 serious illness claims are rejected by insurance companies, while one in five income protection claims are rejected. BCP says this latter rate reflects the difficulty in providing proof of inability to work; the primary reason for claims being denied by insurance companies is non-disclosure of information at the outset; a history of back-related problems is one of the most frequent causes for applications for income protection cover being rejected. The 1997 claims experience for serious illness policies is also covered by this report, which found that the rejection rate for the seven participating companies was just 9 per cent, and, not surprisingly, the largest number of claims were for cancer and heart attack.

The cost of a typical "whole-of-life" or 25-year-term assurance serious illness policy for a 40-yearold male, non-smoking and looking for £100,000 worth of cover, can vary from £78.00 a month to £107.00 for a whole-of-life contract and from £54.00 to £61.00 a month for a term contract.

A woman will pay less: between £65.00 and £100.00 a month for a whole-of-life policy and between £50.00 and £68.00 a month for a term one. The difference in price can reflect the difference in the numbers of illnesses covered, policy restrictions and what BCP describes as other "get-out" clauses.

The BCP report is available from BCP Pensions & Life on 1850 253545.