Information On Critical Illness

Today the majority of critical illness insurance policies are issued with the requirement of a medical examination. The expense and unpopularity with critical illness insurance policy­holders of such examinations have led to their being required only when the sum assured is a large one (large, that is, in relation to the average for that class of business for the company concerned) or the policy is on an older life, or both. Non-medical limits currently range from £20,000 - £50,000 sum assured at ages up to 50; over the age of 55, most companies will require a medical unless the sum assured is small.

Where no examination is required, companies may send your doctor a medical questionnaire for completion which goes into rather more detail than the simple questions on the proposal form. So long as this does not throw up anything that the critical illness insurance company’s under­writers regard as questionable, you will be accepted, but if any point arises that the underwriters regard as indicative of significantly worse-than-average health or life expectancy, you will be asked to take a medical examination. In most cases this examination will be performed by a doctor selected by the company, not your own GP. He receives a fee from the company for his report. In some cases the company may allow you to be examined by your own doctor. This con­cession is most often allowed to women, who tend to be more sensitive in such matters.

If the proposer is found to be what the underwriters call an impaired life (that is, someone with less than average life expectancy) then it is important to know the amount of premium they will require on a given critical illness insurance policy. Practices can vary widely, first in regard to the normal acceptable limits for “first-class” lives - some critical illness insurance companies will take on at normal rates those whom other companies would require to pay an extra premium - and secondly in regard to the actual loading of premium required for particular ailments or even disabilities.

Building society interest rates can change rapidly and substantially. In two recent years (1973 and 1976) mortgage rates were hoisted respectively by over one-third and over one-fifth. Those who had stretched themselves financially to meet mortgage commitments found themselves in trouble. Whereas the repayment mortgage has some flexibility in this situation, the endowment mortgage has none. When the interest rate is raised, repayment borrowers usually have the option of extending the term of the mortgage rather than increasing their monthly payment (extending the term, say, from 25 to 30 years reduces the capital element in each repayment). But this option is not available to endowment borrowers. It makes no difference what the term of the loan is because they are paying only interest, and they cannot stop paying their critical illness insurance policy premiums as there would then be no cover for the loan.

Endowment borrowers who find themselves squeezed have only one, unpalatable, course of action, to convert their loan into a repayment mortgage of the same or slightly longer term, which will reduce the monthly payment. Surrender of the critical illness insurance policy will, as we have seen, produce a derisory return. It is worth remembering, therefore, that it is unwise to be fully committed on long-term loans to the maximum you can possibly afford.

Whether the full or low-cost endowment method is used, it is worth thinking about making the policy a joint one. This means that the sum assured is payable upon illness of either husband or wife. The additional premium required is normally less than the cost of a separate term assurance for the wife for the same sum assured.

Almost all insurance companies now have low-cost critical illness insurance schemes on the market. The main competitive thrust to date has involved the reduction in premium rates to make the schemes more competitive as compared with the repay­ment mortgage. Some plans even involve a reduced premium on the critical illness policy for the first few years and a higher one later, with a deferment (or reduction) in the investment benefits.

One popular use of critical illness insurance policies is in connection with private education. The rise in school fees in recent years has marched along with inflation, and few parents can now afford fees for more than one child out of current income. Increasingly, therefore, advance provision through the use of critical illness insurance is made to ensure that funds will be available during the school years. The normal way is for the parents to take out a critical illness insurance policy or series of policies on their own life or lives, taking loans against the surrender value for any fees required in the first 10 years and meeting fees thereafter from the successive maturity values of a series of small policies.

Savings can then be made on very long period for accumulation. The shorter this deferred period, the lower the saving will be, but even over a few years it may still be worthwhile. Making useful provision over a shorter period also necessarily involves a larger annual investment. Over very short periods such as one to four years, critical illness insurance can be of little help, though those with large incomes may still derive some benefit from investing for fees payable later in the child’s life.

Even if private education is not being considered, thought should be given to the costs of a course at university. The parental contribution required from those with more than modest incomes is now substantial. The assessed maintenance contribution can impose a large demand on the parents’ net income. Advance provision through critical illness insurance policies can reduce this burden.

Often a child’s grandparents may be major contributors to a school fee plan, and here capital transfer tax can be a problem. They can use it to fund a series of critical illness insurance policies. If the period until schooling begins is shorter, and critical illness insurance policies cannot be used, then the parents should avoid investing any of their own money on the child’s behalf. Critical illness insurance can be useful for education.