Protection for illness is a serious business


The promotional literature for serious illness cover makes sober reading. It usually begins with statistics about heart attack, stroke or cancer and ends with a leading question - how would you cope financially with loss of income, mortgage repayments, medical bills, home adaptions or convalescence?

There are two main types of insurance dealing with serious illness or disability. The first is serious illness cover, also known as critical illness cover.

This kind of policy pays a cash lump sum should the person insured develop one of the specified illnesses within the terms of the policy. The payment is tax-free but there is no tax relief for premiums.

The product was developed in South Africa in the early 1980s and introduced to the Irish market in 1987. The range of illnesses covered has increased over the years and companies now provide cover for up to 42 specified illnesses.

Another product, permanent health insurance, is a protection policy that provides you with an income if you are unable to work due to illness or disability. It is a type of income continuance insurance, or salary protection.

Tax relief is available on premiums paid for permanent health insurance, up to a maximum of 10 per cent of salary. When a benefit is paid, it is subject to income tax.

Last year, Irish insurers paid out £118.1 million (€150 million) in claims and benefits to permanent health insurance policyholders and £15.3 million to serious illness policyholders.

Each permanent health insurance policy includes a deferred period. You have to be off work because of illness or disability for the deferred period before you can begin to receive an income from the policy. The deferred period is usually 13, 26 or 52 weeks and the longer it is, the lower the premiums.

In most cases, there is a limit on the amount of benefit you will receive with permanent health insurance; the standard limit is two-thirds of income.

Serious Illness Cover

Who can take it out? The upper age limit for taking out a policy ranges from 55 to 70. The policy can be for a specified number of years; as long as your mortgage, for example, or for life. There is generally a waiting period of several months after taking out a policy before you can claim.

How is it different from the health insurance offered by VHI or BUPA? Health insurance is designed to pay your medical expenses when you are ill. Serious illness insurance pays a lump sum if you are diagnosed with one of the illnesses specified in the policy. The money can be used for any purpose.

What information is required on the proposal form? You will be asked if members of your family have suffered major illnesses in the past. If they have, you may be asked to pay higher premiums or will not be covered at all for certain conditions. Serious illness insurance is more expensive for smokers.

Companies sometimes seek a medical before offering cover, but this does not necessarily mean higher premiums.

The more illnesses listed by the company, the better - right? A long list would appeal to risk-averse persons, who would view an event as much more likely to occur than it actually was. But the definition of the illnesses is more important than the number of extremely rare conditions included.

For a valid serious illness claim, the insured must develop the serious illness as defined in the policy conditions. But beware, because a typical policy description like heart attack does not mean it covers angina. Transient ischemic attacks (TIAs) are not strokes. Non-invasive cancer is not cancer.

How long do you need to survive your illness to get the payout? Sadly, many serious illness sufferers actually die from their disease and most policies stipulate that you must survive for 14 days after diagnosis of the illness for it to be considered a valid claim.

To what extent are policyholders' children covered? Children's serious illness coverage is provided by most companies as part of standard policy benefits. Most provide cover for those aged between one and 18 years. The payout is normally 50 per cent of the serious illness sum assured, up to a maximum of £10,000 to £20,000 if a child of the policyholder is diagnosed as having one of the listed serious illnesses.

What about disability cover? Some companies offer permanent disability insurance as part of their standard cover. Permanent disability is covered by most policies, but definitions differ from company to company.

Some policies cover you for "any" occupation cover, meaning they will pay out if you are unable to carry out any occupation.

The "own" occupation definition is less restrictive than "any", and is available to certain low-risk occupations.

It pays out if you cannot continue with your normal occupation. If you change occupations, you have to notify the insurance company and it will decide whether or not to continue cover. Few companies offer the choice of "any" or "own".

There has been a move recently towards a definition that is more clear-cut, based on being unable to perform three of (usually) five activities of daily living.

Who are the main providers in the market-place? Canada Life, Eagle Star, Friends First, Hibernian Life, Irish Life, Lifetime, New Ireland and Scottish Provident.

How much should you insure for and how much will it cost? It's hard to get a straight answer on this, except from people selling the insurance - and their rule of thumb is five times your salary.

As with any decision of this nature, it's down to a balance between what you need and what you can afford. Needs will vary from person to person, depending on assets, outstanding loans, other income sources and social welfare benefits payable. A good financial adviser can assist in making this decision.

Rates vary from provider to provider, so always look for a broad sweep of quotes.

To give an idea of the cost, a 35-year-old non-smoking female seeking £150,000 (index-linked at 5 per cent per annum) of serious illness cover to the age of 65 can expect to pay monthly premiums of £65 on average.

So how do you choose the right plan? Take your time and seek advice if possible. You need to take into account insurance you already have. Many ordinary life policies have a terminal illness benefit whereby the life office will make an upfront payment of a portion of the sum assured should a person be diagnosed as suffering from a terminal illness.

You can purchase serious illness cover on its own - "standalone" (if you don't survive 14 days there is no payout) - or "accelerated" - meaning a payout on the first event of death or serious illness.

Or you can purchase a policy covering serious illness and death, where your life cover would not be effected by a serious illness claim.

Serious illness cover is seen by many brokers as an optional extra, only to be taken out when other more basic protection products are in place. Of course it provides peace of mind and the money is very welcome for those who succeed in claiming, but this is one kind of insurance policy where you really should read and understand the small print.