The employee can decide how to spend the money: it could be used to fund medical treatment, make necessary changes to their lifestyle or pay off a mortgage.
The medical conditions covered are determined by the critical illness insurer, which usually offers two levels of cover. Base cover will include about a dozen of the most serious conditions, such as heart attack, kidney failure and cancer, while additional cover can add in a further 20 or more conditions, including heart valve repair, loss of speech and third-degree burns.
Cancer accounts for 69% of claims, according to industry body Group Risk Development (Grid). The next most common condition is heart attack, which accounted for 10% of claims in 2012.
To qualify for a payment under a critical illness policy, an employee must survive for a set period of time, typically 14 to 30 days. The payment is tax-free.
Cover is generally provided as a multiple of salary or as a flat benefit. Because it is not intended as a lottery-style benefit, modest sums assured between £25,000 and £50,000 are popular, especially where employees have the option to flex up the benefit. The average claim size was £69,913 in 2012, according to Grid.
Cover for dependants
Employees’ partners and children can also be included in critical illness cover, with child benefit usually capped at £25,000. Most insurers will not require any medical underwriting as long as an employee’s sum assured does not exceed £500,000. However, any pre-existing or related conditions will not be covered.
Added-value benefits are common in critical illness insurance policies. These include employee assistance programmes and access to the second-opinion service Best Doctors.
It is relatively easy to implement critical illness insurance, either on an employer-funded or voluntary basis or within flexible benefits plans. Insurers will stipulate minimum scheme sizes, which depend on the way cover is funded, but they generally start with about five employees.
Default retirement age
As this is a group risk benefit, it is exempt from default retirement age legislation, so employers do not have to offer it to staff who have reached the state pension age. Those that want to go beyond this will find most insurers stop cover at age 70.
If an employer pays for cover, it will be liable for national insurance on the premiums, but will be able to claim corporation tax relief.
Whether critical illness insurance is implemented on an employer-paid or voluntary basis, employers should take care to explain the cover to employees, particularly insurers’ definitions of when they do and do not pay out. For example, although policies cover conditions such as cancer, this will not necessarily include minor forms of the disease that are not considered life-threatening.
Although it does not have the reach of a more established product such as life assurance, critical illness insurance is rapidly gaining popularity. This is partly driven by pensions auto-enrolment, which is leading some organisations to conduct wholesale reviews of their benefits.
Figures from Swiss Re show that the number of critical illness schemes increased by 8.1% to a total of 2,655 in 2013. Premiums and sums assured also increased, by 12.7% and 6.1%, respectively.
What is group critical illness insurance?
Group critical illness insurance pays a tax-free lump sum to an employee who is diagnosed with a serious condition, such as heart attack, cancer or stroke, or is undergoing a specified surgical procedure, such as major organ transplant or open heart surgery.
The benefit is paid once the employee has survived for a set period, typically 14, 28 or 30 days, and is payable whether or not they are able to return to work.
Where can employers get more information?
Group Risk Development represents and promotes the group risk industry. Its website, www.grouprisk.org.uk , includes information about critical illness insurance as well as intermediary and insurance contacts.
Who are the main providers?
Aviva, Canada Life, Ellipse, Friends Life, Generali, Legal and General, MetLife and Unum.
12.8% – increase in the number of staff insured in 2013 (Group Watch 2014 , Swiss Re, published April 2014)
£41m – the value of group critical illness claims paid in 2012 (Group risk industry claims statistics, Grid, published December 2013)
69% – percentage of group critical illness claims that were cancer-related in 2012 (Grid)