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Unpacking dread disease insurance policies

01 August 2009 Gareth Stokes, FAnews

A financial intermediary selling dread disease (also known as critical illness cover) and disability products has to make sure his client is adequately protected against a range of health events. It's a time consuming task that requires an above average understanding of medical events, severity of medical events and a multitude of insurance products. In addition, intermediaries have to contend with client misconceptions around dread disease cover.

Understanding dread disease

Dread disease cover is designed to compensate the individual for having survived a dread disease. It is not an income replacement policy, medical aid substitute or terminal illness accelerator and is totally different to disability cover. The product is designed to supplement the insured's strained finances and meet expenses not covered under personal or state medical cover for pre-defined medical events only. It attempts to address the major impacts on the survivor's life, including lifestyle changes (e.g. alternative medical treatments, the hiring of caregivers and the need for extra rest and relaxation) and the loss of ability of the individual to achieve their full economic potential.

Range of events now covered

The insurance industry focuses on four major illnesses or health event, namely: heart attack, cancer, stroke and coronary artery bypass surgery (CABS). Early dread disease policies only covered these events, but over time the industry evolved to cover long lists of specific health events. Major South African insurance companies now list as many as 20 major health events and diagnoses on their dread disease policy wordings. But knowing the major health events covered on a policy is the easy part.

Standardisation

The sheer number of health events covered, technical definition of what constitutes such an event, and squabbles over the severity of each event contribute to a policy wording nightmare. Even if you understand the wording, it remains difficult to compare various policies. The Life Offices' Association (today housed in the Association of Savings and Investments SA) tried to simplify the debate by pushing the industry towards a standardised set of disease definitions. Members have since agreed on severity levels for the four major categories of dread disease.

To further clarify the situation the country's largest life insurers recently obtained permission from the Financial Services Board and Competition Commission to publish standard disclosures for critical illness products. From 1 September 2009, life companies must provide a disclosure grid indicating the percentage of insurance cover that will be paid out for each of the four main dread diseases and severity levels.

Although the medical event definitions have been standardised, insurers still set their own percentages under each severity level, between 0% and 100%. The disclosure grid will bring much needed transparency to dread disease insurance products and make it easier for intermediaries to advise clients on critical illness products.

Making the right recommendations

The challenge is to match an individual health event (or stage of illness) with the correct insurance product. To assist the intermediary in this regard, Liberty Life drew up a useful diagram The Disability Chain of Events (refer to diagram). The diagram assesses the specific circumstances that trigger benefit claims under medical aid insurance, dread disease, disability/income and impairment products.

Dorian Lack from Liberty Group Advisory Services adds this disclaimer: "Not all accidents or illnesses result in a residual impairment, not all residual impairments result in lost activities of labour and not all lost activities of labour result in lost income. Only some accidents or illnesses result in a loss of income." Lack warns that impairment products are list based, which means that if an accident or illness is not on the list, the client is not covered.

In real life

Liberty Group Advisory Services uses an example to further explain the diagram. Dr Smith, a urology doctor is involved in a serious car accident and rushed to hospital. He is operated on immediately, and his leg is amputated. During his ongoing treatment, a cancerous growth is discovered in his stomach, requiring additional surgery and chemotherapy. Let's examine how Dr Smith's ordeal fits the four stages presented in The Disability Chain of Events.

The cost of Dr Smith's medical treatment, including the amputation, is covered by his medical aid insurance. Dread disease insurance does not compensate for general medical expenses, even if they relate to or lead to the discovery of a dread disease covered under the policy.

Various stages

In this case, the Stage 1 Accident or illness is the subsequent discovery of cancer. The dread disease policy kicks in at this stage because cancer is a dread diseases covered in Dr Smith's policy wording. The benefit paid out should be used to cover the financial cost and emotional strain associated with the cancer diagnosis.

Stage 2, described as Residual impairment will be covered under Dr Smith's impairment policy, which will pay out a benefit to cover the cost of physiotherapy, rehabilitation and emotional strain.

The third stage in The Disability Chain of Events is Reduced abilities & lost activities of labour. Insurers will determine whether an assessment of "activities of daily working" or "activities of daily living" is required, depending on the type and severity of the medical event in conjunction with the profession of the insured.

Stage 4 is described as the Inability to work with loss of future income. Dr Smith's was unable to resume work for a period of 18 months, and this is covered by his disability income policy. Disability cover assumes you will no longer be able to work, whereas dread disease cover assumes you will continue work to a lesser degree. The disability income policy pays benefits based on the severity of the medical event and the impact of this event on the insured's ability to resume his occupation. In this instance the policy provided a disability income for a period of 18 months, but would have paid a capital disability amount in a case where the insured was unable to return to work.

"The financial consequence of a dread disease or an incapacitating accident can often be astronomical and put massive financial stress on an individual or family," says Liberty. Dread disease insurance products are designed to "protect you against the consequences of such lifestyle changing events."

Although dread disease payouts can be spent at the behest of the insured, these funds should be applied to indirect expenses not already covered by other insurance, such as modifications to house and car, alternative medicines or treatments not specifically covered by a medical aid, reconstructive surgeries, prosthetics and the cost of hiring care givers.

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