What diseases do you dread?

Often sold on the basis of chilling statistics, dread disease insurance is at risk of being an emotive rather than rational purchase, possibly to the detriment of a client’s overall financial plan. And that would be dreadful too.

Most of us dread getting sick. But there are some diseases that strike particular fear: cancer, heart attack, strokes. It is exactly these diseases that originally formed the core of dread disease insurance, now also commonly referred to as Critical Illness or Living Assurance.

Down Memory Lane

Back in 1980 Marius Barnard, a member of the first heart transplant team, developed the first such insurance concept in response to the need of his patients. Ironically, after receiving the miracle of heart surgery, patients faced a longer life, ongoing medical costs, and a decreased ability to earn an income, creating a possibility of financial ruin.

The cardiac surgeon had a clear vision and after he finally found an insurance partner, the first dread disease insurance product was launched in 1983.

The modern version

The insurance industry has evolved substantially since then. So what is the exact purpose of this product in 2010? The standard answer is usually any of the following: covering the cost of medical treatment, life style adjustment and rehabilitation, or to replace lost income. Dread disease insurance can indeed help with all of these.

However, in South Africa, the evolution of other insurance products has eroded much of the original purpose of dread disease cover. In some sectors, insurers have competed on the length of their conditions list, adding every conceivable illness that could possibly be dreaded.

Responding to individual needs

As such, we must be careful when assessing a person’s need for this general purpose cover, as other products may be more effective. Disability income or capital disability products are an excellent example. They provide comprehensive and appropriate income protection. The advantage of a disability product is that the payment is based on the ability of a person to work, i.e. the impact of any illness or injury. It is not restricted to the specified conditions in a dread disease product.

This does not mean that dread disease products have no place. The cover should just be understood and purchased for the correct reasons.

Firstly, identify a direct need for a cash payment if the client contracts a listed disease. The focus must be on the financial consequences of the disease, not the disease itself. If an obvious financial need cannot be identified, then the money should be directed to other types of insurance or investment, such as retirement.

Secondly, consider what other products may achieve a similar outcome. Disability policies protect income while medical schemes provide for healthcare bills.

Dread disease products could be used to plug any gaps between these other insurance products, for example, during waiting periods or for uncovered medical costs such as home nursing care.

Moving with the times

Medicine itself has evolved considerably since the day when Ms Darvall’s heart began beating again. Some conditions that were critical then are no longer life threatening. In many cases, medical intervention now restores earning ability and the quality of a person’s life.

This is the biggest challenge to new generation dread disease products: to expand the scope of cover, but also to remove conditions where survival is not a financial death sentence anymore. This will keep the product relevant and ensure clients buy it for healthy reasons.