According to PPS, one in five people will suffer from a serious illness at some stage in their life, and one in eight will contract cancer before the age of 65. Whether or not to take out dread disease cover is a burning question for many, especially because such cover is not cheap. Let’s have a look at how this cover works and what to consider when assessing the need for this cover in your insurance portfolio.
The fundamentals of dread disease cover
Dread disease cover, also referred to as critical illness or severe illness cover, is offered by most long-term insurance companies, and provides financial protection in the event that you are diagnosed with a debilitating illness, whether terminal or not. Dread disease cover takes the form of a tax-free, lump sum payment on diagnosis of a listed illness, bearing in mind that the diagnosis must be made by a registered medical professional. With advances in medical science, we know that humans are living for longer albeit it with severe, sometimes terminal, illnesses which makes dread disease cover more relevant than ever before. Statistics show that that you are far more likely to contract a dread disease than die prematurely or become disabled, so dread disease cover is worth contemplating as part of your overall risk portfolio.
The scope of dread disease cover
Most dread disease cover policies cover cancer, stroke, heart attacks and coronary bypass graft surgery, which are regarded as the Big 4 when it comes to dread disease, although cancer remains the leading cause of dread disease claims. However, you will need to do your research into each insurer to determine exactly what conditions are covered and to what extent they are covered. Generally speaking, comprehensive dread disease policies provide cover for conditions such kidney failure, major organ transplants, chronic liver failure, loss of sight, rheumatoid arthritis and respiratory failure. Your insurer should be able to provide you with a complete list of the conditions covered with a clear explanation of how the disease is covered.
Most insurers offer different levels of cover from basic plans that cover a handful of conditions to more comprehensive cover including a wide-ranging list of conditions. Therefore, if there is a family history of a specific illness that you are concerned about, be sure to check the fine print before signing.
Some insurers also offer ‘catch-all’ benefits which provide cover if you are diagnosed with a disease which is not listed in any other benefit category which results in an impairment. The level of payment in such a case is usually dependent on the level of severity of the impairment. Many insurers have extended their dread disease offerings to include additional benefits such as ICU benefits, early cancer, cancer relapse benefits, and child critical illness benefits, and your financial advisor should be in a position to talk you through the pros and cons of these extended benefits and the costs thereof. The reality is that all insurers offer slightly different variations of cover making it difficult to do exact like-for-like comparisons.
The purpose of dread disease cover
As a lump sum payout, dread disease cover is designed to provide financial relief soon after diagnosis of a severe illness. Once the claim has been paid, you are free to use the money as you see fit. You may want to use the money to make home modification and lifestyle adaptations, settle debt or cover medical expenses not paid for by your medical aid. It can also be used to cover the costs of home care, travel costs for treatment overseas, or to supplement your loss of income.
Stand-alone versus accelerated benefits
When taking out dread disease cover, you can choose to put in place either accelerated or stand-alone benefits, and the type of cover you choose can have a significant impact at claims stage. If your benefits are accelerated, it means that the value of a dread claim will effectively reduce your life insurance benefit by the same amount. For instance, if you have life cover of R1 million, and you claim R200 000 from your dread disease benefit, your life cover will reduce to R800 000. On the other hand, stand-alone benefits do not have the effect of reducing your life cover and can be sold separately or in conjunction with life cover. Naturally, stand-alone benefits are generally more expensive than accelerated benefits as the insurer stands to pay out more in respect of claims.
Underwriting and costs
It is important to bear in mind that not everyone will be able to secure dread disease cover. When underwriting your application for cover, the insurer will take into account your current health status including your personal medical history, HIV status, previous operations, mental health issues, and chronic conditions that you may have suffered from in the past. They will also give consideration to your current lifestyle in terms of smoking, drinking and exercise habits. Your application is likely to also include questions about your family’s health as many diseases are hereditary. Your age, gender and occupation will also play an important role in the underwriting process. Remember, the likelihood of contracting a dread disease increases with age and the earlier you take out cover the better, as later in life you may be considered a higher risk and may become uninsurable. Once you already suffer from a dread disease, you may find you receive an exclusion for this pre-existing condition, or your application maybe be declined entirely.
Availability and length of cover
Most insurers provide the option to take out dread disease cover for whole of life, which makes sense because many diseases are linked to old age and your risk of contracting a severe illness increases with age. However, be sure to check the manner in which your premiums escalate on an annual basis because, if you have high premium escalation, your cover may become unaffordable over time.
Claims assessing and payment
The standard is for insurers to assess dread disease claims according to a severity level and offer a percentage-based pay-out depending on the progression of the illness, allowing for multiple claims as the condition worsens. For instance, if you are diagnosed with stage 1 cancer, the insurer will pay out 25% of your claim. If your cancer progresses to stage 4, the insurer will then pay out the remaining 75% of your benefit. On the other hand, most insurers offer a comprehensive or top-up version of their dread disease benefit which will pay out the full amount on diagnosis of the above mentioned Big 4. Bear in mind that lump sum payments in respect of dread disease cover are tax-free.
Calculating the correct quantum of cover
Dread disease cover is generally quite expensive, so it is important to give careful thought to the quantum of cover your need. In determining the correct level of cover for your needs, give consideration to how comprehensive your medical aid is (specifically with regard to their chronic condition benefit), whether you have gap cover in place, and the extent of your disability insurance. Other factors include what type of support system you have in place should you fall ill, the level of your emergency funding and any discretionary funding that you have access to. Determining the most appropriate level of cover is a balancing act between your affordability and risk protection. Your financial adviser should be able to guide you through the process.