10 things about severe illness cover
This article was first published in the third-quarter 2014 edition of Personal Finance magazine.
Performing heart and other organ transplants alongside his famous brother, Dr Christiaan Barnard, gave Dr Marius Barnard insight into how severe illnesses can affect the finances of those who contract them.
Thanks to medical advances, such as heart transplants, Barnard realised that you are more likely to survive a major health crisis than to die from one, but surviving a serious illness and living with it may be a much greater drain on your finances than dying from the illness.
Barnard’s thoughts turned to life assurance, and he realised the extent of the need for protection from the costs of surviving a severe illness. He persuaded a small South African life company, Crusader Life, to launch the first critical illness policy in 1983. Today, these policies are used worldwide and are referred to as severe illness, critical illness or dread disease policies.
Initially, such policies covered you only against cancer, stroke, coronary artery bypass and heart disease, but now they offer financial protection for those diseases, as well as other life-altering events, such as the onset of Alzheimer’s or Parkinson’s disease, paraplegia, major burns and brain damage.
Since 1983, medical advances and a focus on healthy living have extended our lives, and with increased longevity comes increased risk of contracting a severe illness at an older age.
Dr Eric Starke, the senior medical adviser at Sanlam, says that, although reliable South African statistics are difficult to obtain, international statistics place the lifetime likelihood of suffering from cardiovascular disease at one in two, strokes at one in six, and cancer at between one in two and one in three. He says there are indications that the South African experience is not far removed from these trends.
Although it’s good news that the odds of surviving these diseases are improving, Starke says, ill health can place a significant strain on a household’s finances, which is where dread disease cover comes in. The need to claim for such diseases is beginning to show in Sanlam’s claim statistics, he says.
Nicholas van der Nest, the divisional director of risk-product development at Liberty, says Liberty’s claim statistics show that the amount paid in critical illness claims is increasing year on year. The increase from 2012 to 2013 was just over 12 percent, he says, adding that, although some of this was driven by a greater proportion of Liberty’s clients buying critical illness benefits, Liberty believes there has also been an increase in the incidence of severe illnesses, particularly cancer, in the Western world.
Van der Nest attributes the increase to greater awareness and more active screening programmes. Diagnosis of severe illnesses is happening at an earlier stage and a larger proportion of people are surviving compared with 20 years ago. Liberty’s recent claims statistics show the likelihood of severe illness is highest in the 35 to 54 age group, he says.
Stephen van Niekerk, the head of Momentum Myriad, agrees that claims for critical illness are increasing, and he, too, refers to cancer, which affects 100 000 people a year in South Africa. Momentum’s critical illness claims statistics show that the average 30-year-old has a 25-percent chance of contracting a critical illness before turning 65, he says.
Gareth Friedlander, the head of research and development for Discovery Life, says Cansa statistics show that the lifetime risk of a man suffering from prostate cancer – the most common cancer for men – is one in 24, and the risk of a woman contracting breast cancer is one in 33.
According to Friedlander, increased longevity means that people are living with life-changing illnesses for longer and are more susceptible to multiple claims. In other words, with a long lifespan and a better chance of surviving a severe illness, you could experience a recurrence of your illness, or you might contract other illnesses.
Jaco Gouws, the product manager of Old Mutual’s Greenlight risk cover, says there is no clear-cut evidence yet, but the assumption is that improved diagnostics and the growing problems of obesity and type-two diabetes will lead to an increase in claims against severe illness cover over the next 10 years.
Schalk Malan, the executive director of BrightRock, says the likelihood of the average 40-year-old South African claiming on a severe illness policy is 0.3 percent. Between the ages of 40 and 65, the probability of claiming rises to about 20 percent and on a policy taken out for life, the probability is about 84 percent, he says.
While the impact of lifestyle factors such as smoking, obesity and lack of exercise have increased the likelihood of policyholders claiming, Malan says, the severity of claims events is being reduced, thanks to improved medical techniques of treatment and detection.
1. Why do I need severe illness cover?
If you have sufficient medical scheme cover and lump-sum disability assurance or income protection, your medical expenses and your loss of income in the event of a serious illness should be covered. Why, you may ask, do you need critical illness cover as well?
The providers of severe illness policies all agree that medical scheme cover, disability or income protection cover and severe illness cover serve different needs. A medical scheme can cover you for the medical expenses associated with your illness, subject to certain rules and limitations, but your scheme may not meet all your medical needs. Severe illness cover can make up the shortfall.
Van Niekerk says many people live with a false sense of security that their medical schemes will provide for all their health-related expenses, and they are oblivious to some of the shortcomings. Medical schemes generally cover in-hospital costs adequately, but day-to-day expenses often come out of their members’ savings accounts.
Problems arise with long-term expenses, he says. For example, on basic plans, cover for chronic medication is often limited to a list of conditions – and even the more comprehensive medical scheme options do not cover everything. The costs associated with a critical illness can be significant. The lifetime costs of a severe stroke, for example, can amount to between R500 000 and R1 million, taking into account initial rehabilitation and chronic medication, Van Niekerk says.
On many schemes, he says, you are expected to claim home-nursing costs from your savings account. Once this account runs dry, the recuperating member becomes responsible for all non-hospital nursing services. This is likely to cause financial strain, considering that the lifetime cost of a condition such as Alzheimer’s could exceed R1 million. Treatment is also subject to the scheme’s approval, which is not guaranteed, and many medical schemes insist you use one of a limited number of medical providers to enjoy full cover.
Van Niekerk says new-generation drugs that may be effective in treating diseases such as cancer often take a long time to reach the South African market. Even if the drugs are registered in South Africa, schemes decide on a case-by-case basis whether a condition warrants the treatment. Access to cutting-edge treatment could, therefore, be prohibitively expensive, he says.
Malan points out that your medical scheme may exclude certain treatments, may not cover them in full, or you may reach your annual limits. And a gap-cover policy isn’t always the answer, because some gap-cover products specifically exclude cancer, for example.
Income protection cover replaces the income lost, temporarily or permanently, while you are unable to work. However, Van Niekerk says, you should ask yourself what would happen, for example, if you suffered a stroke, then recovered enough to return to work, but needed to scale down your job to reduce stress. This lifestyle change could result in your income no longer being sufficient to support your family. This is one of many seldom-considered financial consequences of being diagnosed with a critical illness, he says.
Van der Nest says that even if you assume you are covered for 100 percent of your income under your income protection cover and that your medical scheme fully covers your medical expenses, the reality is that you may still incur additional costs. These could be the result of lifestyle adjustments you need to make following your illness – for example, making your home wheelchair-friendly, using certain devices during rehabilitation, or using a wig during chemotherapy.
Other expenses not covered by medical schemes, Starke says, are the costs of travel and accommodation if you have to be treated away from home, childcare when you are unable to provide it, or a longer recuperation period. And having suffered from a dread disease, you will find it difficult to qualify for further life assurance, and even if it is granted after a certain period, it will remain very expensive, he says.
The loss of future insurability is a key reason for taking out dread disease cover, and it is often overlooked, Starke says. The money it makes available can serve as security for obtaining a mortgage or business loan in future.
2. Will my policy cover all illnesses?
Starke says the “big four” severe illnesses – cancer, coronary artery bypass, heart attack and stroke – still account for up to 90 percent of all dread disease claims in South Africa and internationally, but Friedlander says Discovery Life’s claim statistics show that they account for only about 50 percent of the illnesses suffered by Discovery’s clients.
Whatever the number, with cover for only the big four, you are at risk if you contract an illness that is not covered. For this reason, most of the policies now offer comprehensive benefits, but the question is: how comprehensive?
All the assurers say they regularly review the illnesses they include and some add illnesses to existing policies retrospectively. Many policies also have catch-all clauses designed to ensure a successful claim if your illness is severe and has a significant impact on your lifestyle. They ensure you benefit if you contract an illness not listed on your policy.
Friedlander says this kind of clause is critical to cover for conditions other than the big four and prevents severe illness cover from becoming a game of chance. Discovery Life’s philosophy is to cover the widest range of conditions possible, he says, while ensuring that benefit payments match the financial effect that an illness can have on your life (see question three, below). Discovery Life’s catch-all clause is framed around an “activities of daily living” assessment. This is a scoring system used internationally to assess your functional ability, physical and mental.
Malan says you can and should obtain the list of conditions covered by a policy before you sign up, so you can make an informed decision. He says BrightRock covers 300 conditions, whereas many assurers cover fewer than 100 conditions. BrightRock’s policies also take into account the treatment, clinical impact and effect of the illness, and this ensures protection for as yet undiagnosed conditions, Malan says.
Van Niekerk and Van der Nest say Momentum and Liberty offer cover for a comprehensive list of other illnesses besides the big four and include a “catch-all” category for other illnesses. Van der Nest says Liberty also recognises that, over time, the medical definitions contained in the contract could become outdated, the medical tests used to assess the severity of a condition may change, or the surgery used to treat an illness may no longer be relevant. To guard against this, Liberty has a Medical Advancement Protection feature on its policies. This allows for a new test, treatment or definition to be included in the contract when things change.
Gouws says Old Mutual’s Greenlight policies cover an extensive lists of illnesses, and some include a “catch-all” benefit for conditions that affect the quality of your life.
Sanlam has one policy that covers only the big four illnesses, Starke says, but other policies cover a list of illnesses and include a “catch-all” clause, which means any disease may be covered if it seriously affects your health and ability to function, usually on a permanent basis.
3. Will I be paid out the full sum on diagnosis?
Some policies pay out the full assured amount on diagnosis of a dread disease; others pay out a percentage of the amount, depending on the severity of your illness, and include payouts for less severe illnesses – known as “tiered” benefits.
To complicate matters further, some of the assurers that pay the full sum on diagnosis now also offer cover for less severe events at a percentage of the full amount, while some that offer tiered benefits offer an option that pays 100 percent of the assured sum for certain illnesses.
Life assurers that belong to the Association for Savings & Investment SA (Asisa) use its Standard on Disclosures for Critical Illness Products (Scidep) grid, which includes standardised definitions and severity levels for dread diseases. The grid can help you to compare the cover for the four main dread diseases, because life assurers have to declare what their payouts are for these four illnesses at four different severity levels.
lllnesses other than the four most common ones may be covered at 100 percent or on a tiered basis. The level at which your policy pays out will determine whether or not you can claim more than once for the same illness. In other words, if you receive a 100-percent payout for a particular illness, you will not be able to claim for that illness again.
Life assurance companies whose policies pay out in full on diagnosis say most claims are for milder forms of one of the four main illnesses.
These companies say claims for “mild” episodes of a severe illness will continue to increase relative to claims for more serious episodes, because the methods for detecting severe illnesses are improving and becoming more readily available, and more people are taking precautions against more serious occurrences of an illness.
They also say that, even at “mild” levels, an illness can have a huge impact on your lifestyle – for example, if you need aggressive treatment for cancer, or find yourself unable to cope with work. If 100 percent of the assured sum is more than you need, the companies that pay this way reason that you can invest the balance of the proceeds and use this amount to cover future financial needs.
Assurance companies that offer partial payouts linked to the level of severity of an illness say tiered benefits ensure that you have appropriate cover when you need it. They argue that when your illness is not that serious, you do not need a large payout, because your recovery will usually be complete and the impact on your lifestyle will be less than it might have been.
Sanlam and Old Mutual each offer policies that pay out 100 percent of the assured amount regardless of severity, but Starke says Sanlam offers partial payments for some less severe illnesses, and Gouws says Greenlight’s flagship product pays 30 percent for minor conditions – for example, having stents inserted in the event of heart disease.
Tiered benefits can be paid out at an early stage of a severe illness and can offer cover for a wider range of medical conditions. Such policies typically pay out 25 percent, 50 percent or 75 percent of the assured amount. Then, if your condition progresses to a higher level of severity, you can claim the balance of your assured amount. For example, if you have stage one cancer, you may be able to claim 25 percent of your assured amount, but if it then progresses to stage four, you can claim the remaining 75 percent.
Tiered benefit policies help to preserve your cover when it is structured as an early, or “accelerated”, benefit of your life assurance cover (see question four, below).
Life assurance companies that offer both tiered and untiered benefits may provide for your cover to be reinstated for other illnesses after a claim. This could enable you to claim the full benefit again for an illness unrelated to you initial claim.
If an assurer reinstates your cover after an initial claim and you make a subsequent claim, the total amount you claim could be more than the amount for which you were originally insured. The costs for reinstating the cover are built into your premiums when you first take out the policy, so these policies cost more than those that do not allow you to reinstate your cover.
However, reinstatement of your cover could protect you from facing unaffordable premiums on new cover, or finding that you are denied cover when you most need it. Accelerated benefits generally cannot be reinstated.
Liberty, Discovery, Momentum and BrightRock all offer tiered benefits from five percent to 100 percent of the assured sum. Van der Nest says Liberty does, however, offer an optional benefit that increases the payout to the full amount for certain illnesses, where a lower percentage would normally have been paid for that severity level.
Discovery’s philosophy is that your benefit payments should be commensurate with the financial effect that an illness has on your life, so most of its policies make tiered payments, Friedlander says. However, Discovery also offers policies that pay out at least 100 percent of the assured amount on the big four conditions.
Friedlander says Discovery’s LifeTime Severe Illness Benefit can pay out up to 215 percent of the assured amount for a condition other than one of the big four, depending on the impact of the illness, its expected duration, and the invasiveness of surgery, as well as the number of dependants you have.
Malan says that, on some illnesses, BrightRock lets you choose to receive 100 percent of the payout at claims stage, or a lower initial payout, followed by regular monthly payments for a specific number of months, up to 142 percent of your assured amount. If you have not recovered at the end of the period and are likely to face more expenses, he says you can continue to receive these monthly payouts until you have received 200 percent of the assured amount.
BrightRock allows you to claim for progressions of the disease or unrelated conditions up to 200 percent per body system (such as the circulatory or nervous system). Depending on your diagnosis and prognosis, your financial needs and the cover choices you make, you can receive payouts of up to 400 percent per body system.
Van Niekerk says Momentum policyholders can choose between an affordable severity-based benefit offering payouts of 25 percent, 50 percent, 75 percent and 100 percent and a benefit that pays 100 percent, even for less severe conditions.
Momentum’s Myriad policy allows you to extend your critical illness cover to include less serious illnesses, or events such as a hip replacement, through its Plus option, which pays out between five and 15 percent of your assured amount.
4. Stand-alone or accelerated cover?
You can buy dread disease cover as a stand-alone benefit, or what assurers refer to as “an accelerated rider on a life assurance policy”. The latter is far cheaper than stand-alone cover, but you must consider why you want the cover.
The benefit of stand-alone dread-disease cover is that if you claim on it, your life, and your disability cover, are left intact and will pay out in full if you are subsequently disabled or die.
When dread disease or disability benefits are an early, or accelerated, payout of your life cover, the payout will reduce the amount your beneficiaries will be paid when you die.
For example, you may take out R1 million in life cover, with R450 000 in dread disease benefits as an accelerated rider. Should you be diagnosed with, for example, a serious cancer, the policy will pay out R450 000. Should you die from the cancer years later, your life policy will pay out only the balance: R550 000. Once the full amount has been paid, the cover usually ceases completely.
If you have stand-alone cover, some life assurers offer you the opportunity to claim the full cover amount more than once if you suffer multiple, but medically unrelated, dread diseases.
Accelerated cover may be suitable if, for example, you want your outstanding home loan settled by life assurance if you contract a severe illness or die. But if you want to ensure you have dread disease cover to meet the additional expenses you may face with a serious illness and life cover to provide for your family when you die, you will need stand-alone dread disease and stand-alone life cover. Most of the assurers offer both options.
5. How much should I be insured for?
Most assurers agree that there is no easy answer to this question and in most cases, they say, people take out as much as they can afford, rather than as much as they might need.
The difficulty, Starke says, is that life cover, disability cover and income protection are based on needs that can be quantified, whereas no standard formula exists for severe illness cover. He says you need to assess your how much risk you are willing to bear and how much cover you can afford. Starke, Gouws and Van Niekerk agree that your annual salary is the rule of thumb often used in the marketplace.
Van der Nest says Liberty suggests you have a full financial needs analysis, so that your adviser can recommend the level and type of cover most appropriate to your needs and budget.
Malan says that the amount of cover taken out by policyholders ranges from R500 000 to R1.5 million. He says the additional expense you might have to bear is unpredictable, which is why BrightRock’s benefit adjusts at claim stage to your diagnosis and prognosis. For example, the policy provides for a payout of up to 200 percent of your assured amount for a single health event should you need it.
He adds that you should consider the type of medical scheme cover you have, your level of disability cover and your age, because the likelihood of a claim increases significantly as you get older. Approaching retirement age and beyond, you might want to increase your cover, but might be prevented from doing so by your age and a deterioration in your health. BrightRock offers its policyholders a cover conversion option that makes it possible for you to redirect premiums for cover you no longer need to areas of increasing need. For example, as you near retirement age, your need for disability cover decreases, so you can redirect your premiums to cover for the costs of severe illness.
Van Niekerk agrees that the costs of having a critical illness are indefinable and differ from one event to another, making it very difficult to provide clear guidance on how much cover you need. If you consider that the costs of Alzheimer’s can exceed R1 million, or that the super drugs used for cancer can easily cost R400 000 a year, he says it is clearly advisable to take out at least R500 000 of cover.
Friedlander recommends a financial needs analysis with an adviser, but says there is no universally accepted methodology for doing such an analysis for severe illness benefits. In many cases, affordability is the ultimate determinant of the final number, he says. Like some of the other products, Discovery’s Lifetime Severe Illness Benefit has flexibility at claims stage to ensure you get a larger payout for illnesses that have a greater impact on your lifestyle.
In addition, Discovery allows you to convert life cover into immediate cash for a number of life-changing events, including cancer, brain tumours, transplants, connective tissue diseases and problems related to the central nervous system, and the cardiovascular, respiratory, gastrointestinal and renal systems. This means that you can claim for a dread disease even when you do not have dread disease cover on your policy. This feature is standard on all Discovery’s life policies at no extra cost.
6. Should I consider my family history?
Malan says it is a good idea to consider the illnesses that have affected members of your family, as genetics and family history play a significant role in your risk of developing certain conditions. There is a clear link between heredity and serious conditions such as breast and other cancers, heart attack, stroke and diabetes, he says.
Van Niekerk agrees you should consider your family history of critical illnesses to ensure you have sufficient and comprehensive cover for these illnesses, but you should not ignore other likely events. He regards heredity as raising a possibility, rather than a probability, that you will suffer from a particular condition and says you can never know what illness you might suffer from one day. Consequently, you should buy the benefit that provides the best level of protection against all illnesses, within your means, he says.
Friedlander says that some illnesses may be passed on from generation to generation, but many are not. Discovery’s research shows that many illnesses are caused by behaviour. In particular, he says, three activities – smoking, poor nutrition and a lack of physical activity – are the major causes of the big four main diseases.
7. How should cover increase over time?
All the assurers agree that you need to increase the assured amount on your severe illness policy in line with inflation.
Gouws says most of the expenses that severe illness benefits aim to cover, such as rehabilitation costs, grow roughly in line with inflation, so an annual increase of between five and 10 percent is common.
Malan, however, says the additional expenses that dread disease cover is designed to cater for are often medical, so BrightRock recommends an increase closer to medical inflation. Average medical inflation over the past few years has been about four percentage points higher than consumer inflation as measured by the Consumer Price Index (CPI). BrightRock offers you the opportunity to choose to increase your cover automatically by CPI plus four percent annually.
8. Is cover always paid as a lump sum?
Discovery Life, Liberty, Old Mutual and Sanlam offer only lump-sum cover for critical illnesses. Friedlander says it is to your advantage to receive the cash upfront. If the benefit is a recurring payment, you have to survive your illness to receive the benefit and, with some illnesses, your life expectancy may be short. Even if your illness is prolonged, most of the large expenses are likely to occur early on, he says. For example, with paraplegia the expenses incurred immediately after the incident may include modifications to your home and car and absence from work during your recovery.
Van Niekerk says Momentum Myriad’s critical illness benefit pays out a lump sum, but if you have Myriad’s Longevity Protector linked to the critical illness benefit, you can receive an additional 10-percent payment every five years for as long as you live. The regular benefit payments also increase over time to ensure that the payouts hold their value, he says.
If you reach the age of 80 without claiming, you receive 20 percent of your assured amount as a lump sum to supplement your retirement income. In this way, the Longevity Protector protects you against outliving your retirement savings, whether you are critically ill, disabled, or simply live a long life, Van Niekerk says.
BrightRock pays out a lump sum based on severity, says Malan, but for certain conditions it offers you the option of receiving a lump sum plus a recurring payout for a set period. This is based on the fact that certain conditions involve large expenses initially, but then cost you smaller amounts over a number of months, he says.
9. Does cover extend beyond age 65?
Most of the assurers offer severe illness cover for the whole of your life, but you usually need to be younger than 65 to take out the cover. As both Starke and Gouws point out, the risk of contracting a dread disease increases as you get older, as do the premiums, so it makes sense to take out whole-of-life cover at a relatively young age.
Van Niekerk says you should consider the rate of increase of your premiums to ensure that your cover remains affordable.
“Critical illness cover is a benefit you may need in old age and it is vital that you do not lock yourself into a product with high premium escalations,” he says. “We recommend a level premium pattern where, for a set amount of cover, the premium does not escalate from one year to the next.”
You can take out cover with a premium that escalates only to provide for increases in cover in line with inflation, but many life assurers offer premiums that increase in relation to your age. If an age-related premium starts off relatively low, it is likely to rise sharply in future, so some life assurers prevent this by setting the initial premiums higher and keeping the age-related increases lower. Thus, they soften potentially steep age-related increases by using a portion of the premiums paid while you are younger to subsidise the costs of providing cover later.
Friedlander says Discovery Life policies may be taken out up to the age of 65 and he recommends that you take out whole-of-life cover because of the high probability of contracting a severe illness after 65. When Discovery’s disability benefit reaches the chosen expiry age, it automatically converts to a severe illness benefit without medical underwriting. This can assist with extra expenses, such as home nursing, if you contract a severe illness, he says.
As Malan has explained above, BrightRock also allows you to convert disability cover you no longer need at age 65 to severe illness cover, without further underwriting.
10. Can I get cover for stage zero cancer?
The earliest form of cancer, when the cancer cells are localised and have not invaded the surrounding tissue, is referred to as stage zero cancer. If these abnormal or pre-cancerous cells are left untreated long enough, the condition will eventually progress to stage one, when the cells start attacking the surrounding healthy tissue.
Most life assurers cover pre-malignant, or stage zero, cancer only in the case of breast cancer. Recently, however, AltRisk launched an add-on benefit for 17 types of stage zero cancer, quoting statistics from a local reinsurer showing that one in six cancer diagnoses are for pre-malignant cancer.
According to AltRisk, the rise in the incidence of cancer and the growing awareness of the need to be screened for the disease have increased the frequency of early diagnosis. While medical advances ensure that you are likely to survive a stage zero cancer, your diagnostic tests and treatment may come at a price, and these costs won’t always be covered by your medical scheme.
Altrisk says reinsurance data shows that a 30-year-old woman is almost six times more likely to have stage zero cancer than a cancer that is classified as stage one, two, three or four. Statistics also show that among 60-year-old men with cancer, 50 percent of prostate cancers are classified as being at a stage that is too early for coverage by the typical critical illness policy.
Stage zero cancer does not feature on Asisa’s Scidep grid, because Asisa says the purpose of critical illness policies is to provide cover for life-changing events, and stage zero cancers are regarded as “fully curable with minimal intervention and cost”.
Malan says that, in practice, cancer is generally only detected and treated at stage one. However, some stage zero cancers are more clinically serious or more frequently detected, so BrightRock policies cover stage zero of these cancers as part of standard cover, not as an add-on benefit.
Liberty’s policies cover stage zero cancer in only a few specific situations, says Van der Nest, because covering these conditions would increase the premium substantially and even make the assurance benefit unaffordable for many. He also points out that a stage zero cancer is unlikely to lead to the same level of lifestyle adjustment costs that critical illness assurance benefits are designed to cover.
Friedlander says a stage zero breast cancer requiring a mastectomy will generate a 25-percent payout on a Discovery policy. In the case of other cancers, the disease needs to progress to a point where it affects your lifestyle before a Discovery policy will pay out.
Old Mutual launched a new severe illness range in September 2014. The new range now includes cover for a list of early cancers.December 9 2014 at 07:09pm
Acknowledgements By Laura du Preez-PFM IOL severe illness