Advances in medical science mean people are increasingly surviving critical illnesses. Proof is all ...
Advances in medical science mean people are increasingly surviving critical illnesses. Proof is all around us that life goes on after a critical illness (CI), with survival rates improving all the time. But what does this mean for financial planning?
One implication is the need to plan ahead, not just for the day we suffer a CI, but for life beyond CI. A financial plan that stops on the day illness strikes ignores the living proof of all the people who have survived a CI to live their life to the full. To help people plan beyond a CI, it is important to think about what their financial needs, fears and aspirations might be.
Ask anyone who has had a heart attack what they fear the most. The chances are it's having another heart attack. The same applies to cancer and strokes. Sadly, this fear is well founded because these illnesses can, and often do, strike again. The first five years are usually the most vulnerable. This is why most people are uninsurable after a CI and are likely to remain so for quite some time.
When someone has a CI, the payment of a lump sum can make a huge difference to their quality of life. However, when people actually receive their pay out, what they do with it is not always as we might expect. All too often, people are scared of spending the money even on things that would help them get better.
After a heart attack, for example, the best thing is often complete rest and relaxation. What could be better than soaking up the sunshine on a cruise, away from all the stresses of everyday life?
And yet many people are frightened to spend even a part of their money like this. If you put yourself in their shoes, the reasons are entirely justified. First, they have just had a CI and are often dependent on the very people who used to depend on them and so feel vulnerable. Then there is the concern that they may never work again, making this the last lump sum they may ever receive. On top of this, they may worry that their illness may return, although the next time there will be no cash pay out.
There are two types of 'buyback' now products available on the market that can help by providing cover and peace of mind. These are CI cover buyback and life cover buyback. The two are not to be confused because they provide different benefits and work in a different way.
Critical illness cover
CI cover buyback works in the following way:
l The customer buys a CI policy (with or without life cover) and chooses the CI buyback option for a small extra premium.
l If the customer has a CI, a year following the illness they can take out a new CI policy.
l The new policy will cover at least the big three key illnesses, heart attack, cancer and stroke, even if the policyholder has already suffered one of these diseases.
The most important replacement cover is for the big three illnesses for two important reasons. These account for the vast majority of claims and, more importantly, of all the illnesses initially covered, not many strike twice multiple sclerosis, blindness, deafness, TPD or Parkinson's disease, for example. However, it is entirely possible to have a recurrence of heart attack, cancer or a stroke, all of which would be covered.
An important consideration is the cost of the replacement cover when the customer takes it up. Many of these people will not be working following their initial CI and it is essential they are not prevented from taking up the cover they need because they cannot afford it. The best option is if the replacement cover costs only a nominal amount regardless of the customer's age and health at the time.
IFAs with clients who have had a CI will know how much these people want CI cover. You may even have tried in vain to help them obtain cover and will know only too well how much comfort it would give your clients to know that the financial side of things is taken care of.
Life cover buyback
The concept of life cover buyback was imported to the UK from Australia, where it has been sold for a number of years. In outline, it works as follows:
l The customer chooses a plan which pays out on the earlier of CI or death and includes life cover buyback for an extra premium.
l If the customer has a CI, after a set period typically a year the customer can buy back their life cover at normal rates without giving any medical evidence.
Extra peace of mind
As with CI buyback, life cover buyback gives the customer extra peace of mind after a CI claim. They know their dependants will be financially secure at a time when they are probably uninsurable. However, unlike CI cover buyback, having life cover continue beyond a CI can be arranged in other ways. An alternative is to buy two separate policies one for life cover (usually with waiver) and separate CI cover. This has several important advantages, as follows:
l After the CI claim, the life cover continues.
l There is no break in cover during the period before the customer gets the replacement life cover this is often the period when the risk of death is greatest.
l If the life cover plan includes waiver, if the CI prevents the customer from working, the life cover premiums will be waived. With life cover buyback, even though the cover will be at standard rates, this may be expensive because the client will be older and may have no income.
l The CI plan can include CI cover buyback, giving the customer the best of both worlds, continuing life cover and replacement CI cover.
While two separate policies is therefore a better solution in most cases, it may also be more expensive, which is where expert advice from an IFA is essential.
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