Critical illness insurance can act as a safety net for a workforce, but employers must decide how best to offer it to staff, says Amanda Wilkinson
Critical illness cover is pretty simple on the face of it. It is a lump sum benefit that is paid out by the insurer to an individual on a tax-free basis if they are diagnosed as suffering from a life-threatening condition, such as cancer or multiple sclerosis, that is specified by the policy. But that is where the simplicity ends.
The range of illnesses covered varies by insurance provider and can total as many as 30 so-called dread diseases. All critical illness policies should cover cancer, stroke and heart attacks, while other key conditions that are usually covered include multiple sclerosis, coronary artery bypass, kidney failure, and a major organ transplant. Some insurers offer a core level of cover at a set premium, which can be extended to include extra conditions for a higher premium. The Association of British Insurers has published model definitions of conditions in order to provide consistency and clarity.
However, Mike Blake, group sales manager at PMI Health, says: “You [still] need to ensure that you know what is being covered and what you are getting.”
Before a pay out can be made, an individual will have to survive a set period after diagnosis. This is normally set at 28 days, but some policies specify just 14 days.
Employers can offer critical illness cover through a number of routes and the premium varies accordingly. It can be provided as an employer-paid group benefit or offered as an option through a flexible benefits scheme or as a voluntary benefit. Simon Bailey, head of marketing at Aegon Scottish Equitable, Employee Benefits, says: “As a general rule, group schemes are cheaper than if you purchased critical illness cover individually so there is a good financial saving for employees. The other benefit from a group scheme is that generally there will be a free cover limit and policies will not have to be underwritten.”
This means that insurers will work with an employer to set up a scheme with a maximum benefit level that is offered to each employee joining the scheme without them having to provide medical evidence of their state of health. Insurers will generally exclude pre-existing conditions. Employers can decide whether to offer the scheme to all staff or just limit it to senior management.
The benefit will usually be expressed as a multiple of salary or as a lump sum, most commonly between £100,000 and £150,000, and premiums will vary depending on the amount of cover provided. Bailey says an average premium per life is generally in the region of £100-£125 for extended cover and a lump sum of between £100,000 to £125,000, based on cover for 150 lives.
Voluntary cover, where individuals have selected to take the insurance through a voluntary or flexible benefits scheme, is more expensive as there tends to be more claims activity, while age and sex are also often taken into account. PMI’s Blake says: “It’s taken as an assumption that the [insurance] will not cover pre-existing conditions but that is not taken into account until point of claim.”
Critical illness cover can help staff suffering from a dread disease and may assist in their return to work. Wojciech Dochan, head of commercial marketing at provider Unum says: “Traditionally, it has always been used as a windfall type of benefit, [but] the money is there to tide them over so that they can make alterations to their lifestyle or if they need [to retrain for] a new job or pay off loans.”
Although the cost of critical illness is far lower than income protection, the two should complement one another, says Dochan. “A critical illness policy is probably a much better policy for the whole workforce as a baseline cover rather than something like income protection where traditionally the standard product is paid until the recipient reaches 65 years-old. You can cap the amount of cover you may want to pay out from an employer perspective,” he explains.
Product file: Critical illness
What is critical illness cover?
Also known as dread disease cover, critical illness protection provides a lump-sum benefit that is paid out by the insurer to an individual if they are diagnosed as suffering from a life-threatening condition, as specified by the policy.
Where can employers get more information?
A guide to critical illness cover, published by The Association of British Insurers (ABI) can be found at: http://www.abi.org.uk/members/circulars/viewattachment.asp?EID=16937&DID=14774. The ABI’s Statement of best practice for critical illness cover 2006 can also be found at: www.abi.org.uk/members/circulars/viewattachment.asp?EID=15362&DID=12916†
Who are the main providers?
Aegon Scottish Equitable, Bupa Group Risk, Canada Life Group Insurance, Legal & General and Unum provide group critical illness cover.††††††††