Critical illness cover moves to heal the wounds

Unpaid claims have caused sales to slide, so will greater clarity and lower prices restore faith?

No one likes to think about what will happen if they are ever diagnosed with a critical illness - and the financial implications, especially, may well be the last thing on your mind. But if people depend on your income, they could need protecting.

For years, to meet this need, insurers have been selling critical illness (CI) cover to pay out a lump sum if the policyholder is diagnosed with a serious illness such as cancer, a heart attack or stroke.

But according to Swiss Re Term & Health Watch 2006, an annual report on the protection industry, there has been a precipitous fall in sales of CI cover.

This is backed by findings from protection broker Lifesearch, which show that while sales peaked at around 1.2 million in 2002, they are currently around half that level.

One of the emerging reasons for this is a lack of consumer trust in CI cover, which has been sitting uncomfortably in the spotlight over the issue of delayed payouts and rejected claims.

The latest figures suggest one in five claims are declined, mainly because either the specific type of illness isn't covered or the policyholder has failed to disclose an earlier medical problem. That rejection rate has prompted many to question whether CI is a valid product, though Kevin Carr from Lifesearch says any insurance product that pays four in every five claims is "very worthwhile".

Nevertheless, the CI sector is moving to get its house in order. For greater transparency, it has already begun to publish claims data, and the industry is now hoping that a "statement of best practice" will bring a reduction in the amount of declined claims.

This statement is being introduced next month by the Association of British Insurers and must be adopted by all ABI members. Pivotal to this new regime is that there will be 23 medical definitions listed, including three new standard descriptions for Alzheimer's, HIV infection and traumatic head injury. The aim is to improve clarity and understanding for both consumers and advisers.

"The changes will make it easier to compare providers, as standard terminology will be used," says Emma Walker from the price-comparison service Moneysupermarket.com.

"It will be easier for consumers to see what is and isn't included in the definitions - especially in the case of cancer."

The new definitions will also be "future-proofed". In other words, an initial diagnosis from a doctor will not in itself be enough for a policy to keep paying out. The policyholder will have to continue to suffer symptoms associated with the condition.

Mr Carr says that while future-proofing may mean claims for conditions from which you recover, perhaps due to medical advances, will not be paid under new policies, they may still be settled under old ones.

Many insurance brokers hope the changes, combined with lower premiums, will stem the freefall in sales. Falling prices for CI are a relatively new phenomenon. Recent cuts from providers including Friends Provident and Norwich Union have been augmented by some "aggressive rate changes by Bupa", says Ms Walker.

But don't let cheap deals tempt you into rushing for CI cover, as the policies on offer vary hugely. For example, some cover just eight or nine conditions, while others, including Bupa, list almost 40.

You'll also need to decide whether to opt for a "guaranteed" or "reviewable" rate. With the first of these, the price is more expensive at the outset but is fixed for the term. A reviewable deal, on the other hand, may seem cheaper but the price can rise, without limit, during the life of the policy.

Additionally, some CI policies automatically cover your children as a fringe benefit but not all do. Most, but again not all, also include life insurance free of charge, so check this. And if life cover is included, make sure the policy is written "in trust" - usually via a document sent by the provider - to avoid it being included in any calculations of your liability for inheritance tax.

Take particular care when checking the payout rules concerning your employment. Note that some policies pay out only if the illness means you won't be able to do any job, rather than just your own.

As for how much financial cover to go for, protection specialists recommend you aim for the cost of your mortgage, and then add on an income estimate.

Always check whether any cover is provided by your employer, as many offer an element of income protection - a type of insurance that pays out a tax-free replacement income in the event of ill-health.

'We were paying over the odds'

Paul and Suzanne Hesk, both 40, have just bought £120,000 in mortgage protection, life insurance and CI cover from Axa.

The couple have two children - Ashley, 19, and Jordain, 14 - and decided to review their cover when they remortgaged their home.

"I wanted to get some help and advice on protection products as I know you can end up with something you don't need," says Paul. "After speaking to Lifesearch, we realised we were paying over the odds for our cover from Abbey."

By switching to Axa, the couple have been able to save £20 a month. They have also got a more comprehensive policy.

"Our mortgage has a long time to run and we want to know we are covered should the worst happen," Paul adds. "When it came to filling in the paperwork, we were advised to disclose 'anything and everything' in the family's medical history - to avoid any risk of non-disclosure if we need to claim."