I'm afraid we've taken you off the critical list

Specialist health policies may not protect against some serious illnesses.

Pressured by growing uncertainties about work, health and life generally, many more people are buying insurance policies specifically to cover them against contracting a "critical illness". Five years ago, less than 200,000 of these policies were in existence; now there are nearly 1 million.

Legal and General reports that since it recently cut the cost of life cover by 25 per cent, it has found many of its policy-holders, rather than pocketing the difference, are reinvesting the saving in critical illness cover. Others are buying this cover willy-nilly as part of their compulsory mortgage protection package.

For those buying this kind of cover, however, here are some words of warning: more than one in five critical illness insurance claims are rejected.

As the insurance industry gears up to sell even more cover against life- threatening conditions, not least as part of a mortgage protection packages, many claimants are destined to be disappointed.

The moral is, read the small print before you buy and make sure what illnesses are covered, and that are not. Are you covered not just for cancer, heart attacks and strokes, but for Aids or CJD, for example? And make sure you disclose the full truth, or your policy could be useless.

A survey by Employers Reassurance International, which reinsures most of the major household names including Abbey Life, General Accident, Legal and General and Norwich Union, shows that 75 per cent of claims made for permanent and total disability are disallowed. Over half of those that claim because they are paralysed are denied, nearly half of those claiming for renal failure don't get paid and a quarter of those who claim for a heart attacks, strokes or multiple sclerosis are denied their claim.

While cancer claims make up half of all critical illness claims, however, only 11 per cent are denied.

The most important single reason for not paying out on a claim is failure to disclose either an existing condition or related illness at the time the policy was taken out.

Over half are denied because of misdiagnosis which includes everything from frivolous claims where a man with a broken leg claims for permanent disability, to those who claim for benign tumours when only malignant cancers are covered. There are also the downright fraudulent claims. As the report states: "Our own experience suggests that the temptation of submitting fraudulent claims remains higher than for other life products."

For the insurance industry, there is the worrying fact that over 10 per cent of all claims come within three months of the policy coming into effect.

Phil Cleverley, underwriting manager with Employers Re, says: "Our research shows that one-third of claims are made within a year of taking out a critical illness policy - which shows that there is what we call in the industry some anti-selection going on against the insurance companies involved. Some people just take the attitude that they should try their luck, that they have nothing to lose.

"We are advising the companies we reinsure to be very careful about these policies. Of course, there are also many who do not understand the small print of these policies, the exclusions and the very tight definitions."

One of the most contentious areas is permanent and total disability. While most feel that if they can no longer do their job then they should be able to claim, many policies state that if the claimant can do any job, they are disqualified. Employers Re, which does rolling research into critical illness claims, feels that there has been very little difference over the past 12 months in the percentage of these claims being denied.

Grant Barron, personal market manager with Norwich Union says: "There is a lot of confusion about what is permanent and total disability. We have one on at the moment where someone who has developed a cataract in one eye, which can be easily operated on, is claiming for total loss of sight. A quarter of the claims we get go no further than our replying and spelling out what is or isn't covered.

"We are here to pay out, and the public will never get unless it asks. This a very new market and these misunderstandings are very much an early- days problem."

In fact, many feel that the high level of rejected claims are just part of the teething process of a growing market and, as insurance companies make their wording clearer and the general public understands better what life-threatening cover is all about, so the number of claims declined will go down. While losing a kidney is very serious, it doesn't stop the individual living and working his or her normal life span. Angina may be heart-related, but it is not the same as a life-diminishing heart attack.

Abbey Life, which leads the market in critical illness policies, has paid out pounds 28m in claims, two-thirds of the industry total. Its figures show that 86 per cent of the claims paid come from heart attacks, cancer and strokes. A typical pay-out was for a computer operator who developed testicular cancer. Although he has since recovered, his benefit was pounds 53,537. A female aged 33 suffering from malignant melanoma cancer, although now fully recovered, received pounds 54,000.

Each year, 250,000 are diagnosed as having cancer, 300,000 have a heart attack and 100,000 suffer a stroke. Small wonder then that demand for this kind of cover is on the increase.