Dread disease cover: how to compare apples with apples

Dread disease cover is arguably the most complex of financial products. It causes confusion among clients, and even financial advisors, when it comes to choosing the best cover and making a claim. But there is a way to break down these complex products me

“Many dread disease benefits are marketed based on the long list of medical conditions they cover. To the uninformed client or financial advisor this will naturally sound like a wonderful product and they’ll deem it better than one that covers fewer conditions. But this can be deceiving because all products have complexities concerning what stage a condition should be at before cover is paid out, and what percentage of total cover is allocated for each condition.

“The key is to fully grasp the four key pillars on which every dread disease product is built – claim event, definition, design and incidence. It is essential, when analysing a product, to work methodically through all four pillars to make a like-for-like comparison.”

Here Dr Starke breaks down the pillars to help equip clients and advisors to analyse and compare dread disease covers.

Pillar 1. The claim event

This is the simple one – and the one most people stop at when analysing dread disease cover. It refers broadly to the medical conditions which are covered under the product such as a heart attack, Cancer, stroke or Alzheimer’s etc. Some products cover a very long list of conditions – looking impressive while others have a shorter list, which looks like a less comprehensive product. But looks can be deceiving and that is why it is critical to move on to pillars 2 to 4 to get the full picture.

Pillar 2. The definition

This is where it gets more complicated because dread disease products do not offer cover for every stage or severity level of every condition. To keep the product affordable, each claim event has a detailed description as to exactly how the medical condition must present before it is paid. Some definitions can be so strict that a claim will only be paid in the very late stages of the disease. It is important that clients and financial advisors familiarise themselves with the description of each claim event. More emphasis should be placed on the definition of each claim event to really determine the appropriateness of the benefit.

It will likely not be easy for a layperson to fully grasp these medical technicalities. Financial advisors should consult the medical advisors at the product providers or tap into other medical experts to help them understand the detail around the definition of each claim event listed.

Pillar 3. The design

Then, digging a little deeper, it is important to review the design – which is the layout and payout structure - of the product, i.e. what percentage of total cover will be paid out for a certain medical condition. For instance, one product may pay out only 50% of the policy for a defined heart attack while another will payout 100%. Or the one product will payout 25% for a stage one cancer while another product will pay 100% for the same stage. One product may cover a claim event for a 5-15% benefit while another product does not cover this claim event at all. To gauge whether or not these percentages are likely to be adequate, the next pillar needs to be closely analysed, the incidence...

Pillar 4. The incidence

In my view, this is the most important pillar to examine. How likely it is that you or your client will actually get a certain condition. Approximately 85% of dread disease claims in 2012 were for just four medical conditions: heart attack, cancer, stroke and coronary artery bypass surgery. A product with a long list of claim events is not necessarily a better product if the majority of claim events have a statistical low incidence. Google is a very useful tool for tracking down the incidence attached to a condition.

Starke says there are other complexities attached to dread disease benefits, such as the existence of tiered and non-tiered products, but the four pillar approach can be applied equally to all such products. “Every life covered has a very individual set of circumstances so the most appropriate product will be very different in each case. A good understanding of how to review each product will help immeasurably with the product selection process.”

He concluded that it is worth keeping in mind the original intent behind establishing this type of cover. “It was never meant to play the role of a medical aid or provide cover for occupational disability. Dread disease cover was conceptualised by Prof Marius Barnard with the intention of ensuring people who are diagnosed with severe illnesses that will have a major impact on their financial situation, are able to claim for financial assistance.”