Critical illness cover: Advisers campaign in support of the forgotten insurance
“Our most valuable asset is ourselves, and yet we’re so woefully poor about getting ourselves [properly] protected,” says Tim Searle, chairman of the Dubai-based wealth management firm Globaleye.
Searle is addressing one of the topics he feels most passionate about, as a financial adviser with more than 20 years of experience: the failure of most people to insure themselves against the possibility of becoming critically ill.
“Like the spare tyre of your car, better to have it and not need it, than need it and not have it,” he says.
“Critical illness cover is not a luxury, and will be the most expensive thing you didn’t buy. We insure our cars, houses, phones, cats… but the most valuable asset – our lives – we rarely do.”
Critical illness cover – which is sometimes known as “dread disease insurance”, and even as a “dread disease rider” to a life insurance policy – is a fairly recent development, coinciding with the emergence of medical technologies that have made it possible to live a long time with many illnesses without actually dying of them.
As US-based General Re Corp insurance executive Steve Rowley noted in a 2012 blog on his company’s website, the genesis of critical illness insurance is a story in itself, in which the central character is South African heart transplant pioneer Dr Christiaan Barnard’s brother, Marius, also a doctor.
Marius Barnard saw the need for a critical illness-type of product, and was instrumental in developing the first one, which had its debut in August, 1983, Rowley reports, adding that Gen Re “at that time named Cologne Re, was one of the reinsurers who saw the need” for it, and helped to enable it to become a reality.
While the insurance is now being sold in more than 50 countries, though, it remains expensive, and there are medical conditions which, some policy-holders have discovered to their cost, it hasn’t paid out when these policy-holders and others thought it would, which has made some wary of it.
As a result, at Globaleye – and across the IFA community, to hear other industry executives talk – persuading clients to commit to critical illness insurance is a constant and uphill struggle.
Clients, they say, are eager to plan their finances for the future, and often willingly take on large financial liabilities, ranging from mortgages to school fees. But when it comes to the possibility that illness might, at some point, force them out of work for a significant period, or permanently – thus potentially jeopardising all their painstakingly arranged financial plans – more often than not, it seems, they don’t want to know.
As many top financial advisers will tell you, this is illogical in the extreme.
That’s because there’s overwhelming statistical evidence to suggest, for example, that we’re more likely to be diagnosed with a critical illness by the age 60 than we are to die by that point.
Last year, Cancer Research UK, a UK charity, reported that fully half of those born in the United Kingdom after 1960 can expect to be diagnosed with cancer at some point in their lives.
Given such statistics (and others, see box, above), the fact that only a relatively small proportion of most advisers’ clients ever actually take out critical illness cover is all the more surprising, since it is designed to pay out an agreed cash lump sum just when an individual needs it most – which is to say, just at the point when a critical illness, of a type specified by the insurance provider – has been diagnosed.
This enables the policy holder to meet all of his existing bills, rather than just his medical expenses.
Common illnesses typically covered by critical illness insurance include certain cancers, strokes, heart attacks, blindness and Crohn’s disease.
Though there may be relatively low uptake of the insurance, insurers typically pay out large sums each year anyway: hundreds of millions of pounds annually, in the case of the UK alone.
The Association of British Insurers said that in 2014 – the most recent figures available from the trade body – insurers paid out £965.4m in critical illness cover, representing an average claim of about £67,000. By contrast, they paid out £540m that year in whole of life insurance – which the ABI said represented an average pay-out of just £7,403.
Nevertheless, protection insurance – of which critical illness cover is a type, along with private medical insurance, life insurance and income protection insurance – accounts for less than a fifth of total revenues at Globaleye, according to Searle.
David Reed, a Shanghai-based director at wealth manager Oscar Winson, says only between a third and half of the clients he has provided with life insurance advice have taken out critical illness cover.
“People generally don’t like to think about what it means to become critically ill, and the stats of becoming critically ill,” he says.
For Searle, pictured left, this is one of the more frustrating aspects of being an adviser. Clients, he believes, should “just be buying it”, and not need to be sold on the idea.
“We shouldn’t have to sell any of this stuff,” he insists, arguing that if people understood how important it was, for the price, they’d be “queuing out the door”.
The cost factor
What turns people off, perhaps not surprisingly, is the cost, advisers say. Because the likelihood of a claim is so high, critical illness cover is typically three to four times more expensive than life insurance.
This makes people place critical illness insurance well down their list of priorities, beneath such more conventional uses for their extra cash as savings and investments, advisers add.
This is the case, even though “if you were to have a critical illness and you don’t have that insurance in place, you’re not able to work, and [thus] you’re not able to save into your regular savings,” Claire Walker, a Dubai-based area manager at deVere Acuma, points out.
“Protection [insurance] should be a priority. If you’re too sick to work, you can’t save into that retirement plan.”
The health insurance fallacy
One common misunderstanding among clients is the assumption that their private health insurance will cover them in the event of a critical illness, according to Brett Evans, a managing director at Atlas Wealth Management, which specialises in looking after expatriate Australians from its base in Southport, Queensland.
“Due to how expensive it [critical illness cover] is, versus the level of cover when compared to policies like life insurance or [total and permanent disability insurance], some clients will wonder if it is worth having,” he says.
“This is usually due to the client also not completely understanding how the policy works.”
He says it’s contingent on the adviser to explain that without critical illness cover, they will not be covered for “some rehabilitation treatments, medication, [and] on-going care at home”, even if they have other types of protection insurance.
“[And] what if their partner needs to stop work for a period of time while they undergo treatment? These are all very common points of discussion with clients when the topic of critical illness cover comes up.”
Advisers should address critical illness cover as a priority when meeting a new client, according to Walker, who said that at deVere Acuma, advisers routinely consider a new client’s critical illness coverage needs as part of their initial evaluation.
“All financial planning should start with the basics such as life insurance, critical illness and health insurance,” says Oscar Winson’s Reed.
Searle says his way of handling the critical illness cover conundrum is to take what he calls a “holistic approach”: he advises clients who are putting cash aside into a savings account, but who have no critical illness protection, to reduce their savings, and reallocate the capital to insurance.
“Your saving plan is going to get shut down straightaway” if you become ill and can’t work, he says, explaining how he justifies the strategy to those reluctant to cut back on their current savings programme.
Whereas, “if you have [insurance] in place, everything can remain as it was.”
Corporate CI cover
Meanwhile, some advisers say, individuals aren’t the only ones who need to think about critical illness cover. There’s also something known as “key man critical illness cover”. And, once again, perhaps not surprisingly, corporations are said to be as ill-prepared in this area as individuals.
Indeed, Globaleye’s Searle says key man critical illness cover, which pays a lump sum to a company to pay for an interim replacement should a named senior figure become ill, “is the last thing” corporates think about.
The bottom line, Searle and others say, is that the industry has to promote the benefits of critical illness coverage through marketing, and combine this with making discussions of the advantages of being properly covered a priority when meeting clients.
The usual methods of promotion, according to advisers, include seminars, email advertising and promotion through online expatriate blogs.
Improving the discourse surrounding critical illness and educating clients are vital, says Reed, who urges IFAs to “get out there and talk about it more”.
“Explain what it means to be critically ill and how that can affect your lifestyle, income, everything,” he says. “I can guarantee if you’re sitting down with people discussing it professionally, people are going to be interested.”
KEY CRITICAL ILLNESS INSURANCE PROVIDERS
Friends Provident International and Zurich stand out as two of the biggest and best critical illness providers to the expat market, according to advisers – the rest of the market is typically less competitive, with fewer illnesses covered, they say.
FPI, which has been a part of the Aviva Group ever since Aviva’s acquisition of Friends Life in April 2015, serves more than 160,000 customers globally, in such markets as Hong Kong, Singapore and the United Arab Emirates.
Zurich International Life, part of Switzerland’s Zurich Insurance Group, provides critical illness cover to retail customers in Hong Kong and Dubai, according to the company. (“ZICS” would be the equivalent for the company’s corporate customers). Zurich International Life operates from the Isle of Man, with branches in UAE, Bahrain, Qatar and Hong Kong.