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Dread disease cover: Ensuring financial survival after diagnosis

Surviving a serious diagnosis can create an enormous financial burden.

Dread disease cover is long-term insurance that pays out a capital lump sum on the diagnosis of a severe ailment – the most common four cancer, heart attack, stroke, and coronary bypass graft. In its almost 40 years of existence, dread disease cover – also known as critical illness or severe illness cover – has had to continually adapt to keep pace with advances in medical science. As a result of significant progress made in the field of medicine, we are now more likely to survive into old age with a severe illness than suffer from a permanent disability or die prematurely.

Surviving a serious diagnosis can create an enormous financial burden, and in this article, we unpack how dread disease cover can help one survive financially in the wake of severe illness.

While all major insurers offer dread disease cover, this area of long-term insurance has become more complex over the years and is best navigated with the guidance of an experienced independent financial advisor. As a layperson, it is almost impossible to make like-for-like comparisons between insurance products, whereas a financial advisor will have access to research tools that allows them to prepare more accurate comparisons and quotes.

When looking for suitable dread disease cover, it is important to determine exactly what conditions the insurer covers and to what extent, keeping in mind that every insurer has a different product offering and structure. While you might be swayed to take out cover with an insurer who covers in excess of 300 illnesses as opposed to one that only covers 30, keep in mind that it is the likelihood of diagnosis that matters more. Statistics show that between 70% and 90% of all dread disease claims are in respect of the most common four illnesses listed above, which means taking out insurance for those illnesses that are most likely to occur is more important than cover for a huge array of little-known illnesses that are not as likely to occur. As a result, a product that offers a longer list of conditions is not necessarily a more comprehensive product, so research is key.

Products are continually expanding to the extent that most major illnesses are covered including chronic liver and lung diseases, kidney failure, muscular dystrophy, Alzheimer’s disease, Parkinson’s disease, paraplegia, blindness, deafness, cerebral aneurysm, motor neuron disease, coronary artery angioplasty, ulcerative colitis, and Guillain-Barré syndrome.

In addition to understanding what conditions are covered by your policy, it is important to understand the extent to which your illness will be covered. While some products provide a full payout on diagnosis, other products pay out a percentage of the sum insured depending on what stage of the illness you are in, known as tiered benefits. For instance, a product may pay out 25% of the sum insured if you are diagnosed with Stage 1 cancer and, if the cancer progresses to Stage 4, pay out the remaining 75% of the benefit.

Remember, because medical science has allowed us to live longer with severe illnesses, it is common to have multiple claims for the same or unrelated illness over time and as the disease progresses. Some policies include a catch-all clause which means that you will be covered for any disease to the extent that it permanently affects your health and your ability to function.

Understanding exactly how your benefit is structured is important as it generally impacts your other long-term insurance benefits. At the outset, it is essential to know whether your benefit is a standalone or supplementary benefit, or whether it is an accelerated or rider benefit. Accelerated benefits are usually included on a life insurance policy which includes dread disease and/or lump sum disability cover. If your benefits are all accelerated, it means that the value of a dread disease claim will effectively reduce your death and disability benefit by the same amount. For instance, if you have life cover and capital disability cover of R1 million, and you claim R200 000 from your dread disease benefit, both your life cover and capital disability cover will reduce to R800 000.

On the other hand, standalone benefits do not have the effect of reducing your life cover and can be provided separately or in conjunction with life cover. It goes without saying that standalone benefits are generally more expensive than accelerated benefits as the insurer stands to pay out more in respect of claims.

Choosing between a standalone or accelerated benefit depends on your overall financial goals. For instance, if the purpose of your life cover is to create liquidity in your estate in the event of your passing, implementing an accelerated benefit may result in your estate being illiquid should you ultimately succumb to your illness. Some insurers provide a mechanism for cover reinstatement in respect of standalone dread disease benefits, the cost of which is built into your monthly premiums. In such circumstances, the insurer will reinstate your benefit after you have claimed from it to enable you to claim from it for a future, unrelated illness. While in the past dread disease cover terminated at age 65, most insurers now offer the option of taking out whole-of-life cover meaning that the policy only terminates on your death.

If you apply for dread disease cover with a pre-existing medical condition, the insurance underwriters may elect to load your premiums to account for the additional risk that you pose, or specifically, exclude the condition from cover. In addition to specific policy exclusions, most insurers apply a set of general exclusions which include claims for self-inflicted injuries, attempted suicide, drug and/or alcohol abuse, elective termination of pregnancy, or where the insured earns an income from illegal or criminal activity.

Another consideration when taking out your policy is to select a premium pattern that is best suited for your needs. While an age-rated premium pattern may result in lower premiums earlier on, these premiums tend to rise sharply as you age. To counter the effects of this, some insurers soften the curve by starting out with a slightly higher premium which is used to cross-subsidise the cost of future cover, allowing for a smoother premium increase over time. Being a highly complex area of financial planning, we always advise that a person seeks independent advice before locking oneself into a premium pattern that may affect their future affordability.

There are a number of types of waiting periods that may apply to your dread disease cover. Many insurers include what is referred to as a minimum survival period, which is the period you are required to survive after diagnosis. A minimum survival period will depend largely on your policy but can range between 14 and 28 days. While it may sound harsh, remember that the purpose of dread disease cover is to provide the insured with financial support while living with a severe illness and, as such, a minimum survival period is designed to protect the insurer from paying out a so-called ‘living benefit’ when end-of-life is imminent. Some insurers may insist on a waiting period before your cover comes into effect, during which period you will be unable to claim.

Keep in mind that the process of claiming from your policy may be time-consuming and frustrating as you may be required to undergo further medical testing or examinations or obtain confirmation of diagnosis by another medical practitioner. There may also be investigations into the extent to which your activities of daily living have been impacted by your illness. That said, your financial advisor should be well-schooled in the claims process and should be in a position to assist you throughout the claiming and claims payment process. 

The extent to which the lumpsum payout can be used is limitless, although expenditure is likely to be driven by the type of disease you are diagnosed with. For instance, in the case of quadriplegia or paraplegia, one might use the funds to cover the costs of a modified wheelchair, home and bathroom modifications, the installation of ramps or lifts, vehicle modifications, home care, ongoing physical or occupational therapy, or alternative therapies not covered by medical aid.

On the other hand, in the case of a cancer diagnosis, the funds may be used to cover the costs of wigs, the costs of childcare or au pair support, travel to and from treatment, new medical treatments not yet covered by medical aid, or palliative care and support. You may also wish to invest some of the capital to make financial provision for your future, especially if you are underfunded for retirement.

ADVISOR PROFILE

Gareth Collier

Crue Invest (Pty) Ltd

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