Do critical illness policies pay out?

Do critical illness policies pay out? Thumbnail

Posted 20th August 2021 by

In the UK there’s a deep-rooted mistrust between consumers and insurance companies. Life insurance and critical illness companies are regulated by the Financial Conduct Authority (FCA) and annually publish their claim payout records. So, do critical illness policies pay out? Yes, absolutely! Critical illness insurance payout rates are usually north of 90% while life insurance is usually above 98%[1].

Despite these facts, in a world of misinformation and fake news, stories still circulate social media further adding to the myth that these policies do not pay out.

These myths damage trust and dissuade good, hardworking people from protecting themselves and their families from financial hardship should the worst happen.

The FCA has been working with industry partners for over 10 years on this issue and we have seen some great progress.[1] We’ve also heard many concerns about how best to communicate information around claims settlement to help build consumer confidence.

Insurers have produced far more consumer focused messaging recently explaining their excellent claim payout rates but also why a claim would not be paid.

Our aim today is to collate some of those facts and figures to show you that critical illness policies do pay out.

What is critical illness insurance?

Critical Illness Insurance pays lump sums when your condition meets the insurer’s pre-defined definition. Typically, this is when it becomes serious enough to require hospital treatment or surgery, but not always.

It can cover conditions such as cancer, heart disease, stroke, diabetes, kidney failure and other long term illnesses. The money paid out is often used to help pay for essentials like mortgage payments, rent, household bills, food and other living expenses.

Unlike a life insurance policy, that is designed to payout when you die, critical illness is a form of insurance that you could see the benefit of while you are still alive.

Often the implications of becoming critically ill are not dissimilar to dying. Your income may stop if you need to take an extended period off work. It’s important to consider just how long your savings would last in helping pay for everyday living, such as the bills, whilst your income is limited or non-existent.

Income protection can work similarly, but the large difference is, income protection insurance is designed to pay you a monthly payment while critical illness will pay out a lump sum.

Who needs critical illness insurance?

Anyone who wants to protect against the possibility of being unable to earn an income due to sickness or a critical illness has the option to take out a critical illness insurance policy. People who could benefit include:

  1. People at risk of losing their job because they cannot perform their duties
  2. Self-employed individuals whose business relies upon them performing well
  3. Those looking to provide support for family members who rely on them financially

Like most things in life, there are pros and cons with critical illness cover. A lump sum of money cannot cure an illness, but it can give you choices. On diagnosis of a critical illness, at least you’ll have one less worry allowing you to focus on treatment and recovery.

 Which insurer has paid out the most critical illness cover claims?

Insurers report their claim payout statistics each year. The table below shows publicly available claim payout rates:

Insurer201820192020
Aegon93.00%94.00%93.00%
AIG94.00%96.00%
Aviva92.60%92.60%92.70%
Canada Life – – –
HSBC –98.00% –
Legal & General 93.00%91.90%92.00%
LV=89.00%87.40%87.80%
Scottish Widows94.00%93.00%
Vitality Life91.20%92.90%
Zurich91.00%90.00%87.00%

 *Data provided by Protect Line from a variety of sources [1]

Insurers that have not yet reported their 2020 claim payout rates have been excluded. Canada Life have not yet been selling Critical Illness insurance in the UK long enough to need to report statistics.

It’s clear to see from these numbers that thousands of families benefit from critical illness cover.

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Family illustration

What illnesses are covered?

The conditions that Critical Illness Insurance will pay out for varies depending on the insurer, however all critical illness policies should include cover for cancer, heart attack and stroke.

Each insurer sets out the conditions they cover along with their bespoke definition in their policy documents. For insurers which subscribe to The Association of British Insurers (ABI), there is a set list of minimum definitions for a number of conditions including alzheimer’s disease, heart attack, stroke, and some types of cancer. All of Protect Line’s insurance partners subscribe to the ABI.

However, it’s worth noting that many conditions that fall into each category so check what your specific policy covers before buying by referring to your policy terms. Also ensure you carefully check if any exclusions apply.

How much does critical illness cost?

Critical illness costs vary dependent on your age, health, lifestyle and the cover length and amount. As a rule of thumb, it’s typically 10.5x the price of the equivalent term life insurance policy.

The reason that critical illness cover is more expensive, when compared to Life Insurance, is you’re 4x more likely to make a claim.[1]

There are two main ways to buy critical illness insurance – either through an insurance broker or directly from the insurer. A whole of market broker, such as Protect Line, has access to multiple insurer’s prices.

Some brokers don’t charge an upfront fee. They’re paid a commission from the insurance company if you choose to take cover with them. If you choose to use a broker that does not offer advice (non-advised) they are obliged by regulation to understand your circumstances and offer you the relevant options, including your best price available, so you can choose what’s best for you.

Your insurance expert can also help you compare different cover levels to find a price to suit your budget.

blue gloves holding a heart

What illness is most likely to result in a payout?

Heart attacks, strokes, cancers and other serious diseases can leave people permanently disabled. According to the ABI, these are also the most common causes for a successful claim (80% of claims)[1]. Luckily, more and more people each year survive their illness. Although these stats make great headlines and help keep families together, it does sometimes mean life changing surgeries or treatment plans. Critical illness insurance can help bridge this recovery gap.

It’s important to not confuse this cover for terminal illnesses. In contrast, terminal illness is typically when a doctor gives you less than 12 or 18 months to live (dependent on your insurer’s definition). Usually, life insurance policies will offer the option to pay out a lump sum early if you’re diagnosed with a terminal illness.

People get sick every day. Some days we feel fine and others we get ill. It’s impossible to predict when this might happen. It’s also impossible to know what disease or illness you may get. This type of cover can seem complicated because insurers all cover different illnesses and often define those illnesses differently too. All of the policies sold by Protect Line use the ABI (Association of British Insurers) guidelines, which set out the minimum standards for the most common illnesses. These days many insurers go above and beyond these definitions too.

If you need help to compare cover or insurers, be sure to speak to one of our experts.

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Family illustration

Is critical illness really worth the cost?

The ABI reported that £1,128,825 was paid out in critical illness claims in 2020[2]. The average payout was £67,011[3]. A lump sum of that size is bound to make a substantial difference to most people’s lives, especially at a time where you’re possibly not working and may need more help from close family members.

Recent figures from Protect Line illustrate that critical illness cover could be as much as 10.5 times the price of standalone term life insurance cover.

Therefore, it comes down to a personal choice and affordability. If you cannot afford as much critical illness as you like, it’s possible to start with a smaller policy than your life cover. Speak to your life insurance expert if you’d like to compare quotes.

Why would critical illness cover not pay out?

These are the main reasons a claim might not be accepted:

  • Your illness did not meet the criteria set down by the insurer.
  • Information given to the insurer when the policy was taken out was either misrepresented or non-disclosed.

The majority of claims that are not paid are for the second reason. It’s important to disclose your full medical information if asked by the insurer, answering any and all questions accurately. If you’re paying your premium each month, you’re going to want to ensure you can make a valid claim.

stethoscope with heart ontop

The Bottom Line

Critical illness policies pay out if you are honest on your application and you meet the provider’s definitions when you claim. The average payout is more than twice the average UK annual household income[4].

If you’ve got any concerns regarding whether critical illness cover will work for you then speak to our experts today!

 

Get a free life insurance quote today

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Family illustration

 

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[1] Sources for data include:

https://www.covermagazine.co.uk/feature/4017341/market-round-critical-illness-claims-stats-2019

aegon.co.uk/personal/insurance/claims.html#:~:text=In%202020%20we%20paid%2093,%2C%20on%20average%2C%2093%25.

https://www.aviva.co.uk/adviser/documents/view/pt151147-2020_individual_protection_claims_report.pdf

https://www.legalandgeneral.com/adviser/protection/why-legal-and-general/claims-payment-record/

https://www.lvadviser.com/service/documentlibrary/get/8c0129414bd145b7aa25b17ae2f6926e/claims-brochure-performance

https://www.zurich.co.uk/en/about-us/media-centre/life-news/2021/zurich-protection-claims-payments-up-23-percent-in-2020

[2] https://www.abi.org.uk/news/news-articles/2021/05/record-amount-paid-out-to-help-families-cope-with-bereavement-ill-health-and-injury/

[3] https://www.abi.org.uk/news/news-articles/2021/05/record-amount-paid-out-to-help-families-cope-with-bereavement-ill-health-and-injury/

[4] https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyear2020

Chris Reed

Senior Financial Service & Marketing Leader | Experienced in Sales Leadership, Business Development and Digital Marketing Lead Generation | Passion for progressing business using technology.

I have worked for Protect Line since 2011 in many different positions. I have a passion for protection and I love helping ensure as a business we talk in plain English.

In my opinion, financial protection should be a part of our schools curriculum. Currently it's down to the private sector to help provide unbiased factual information.

My aim is to help share the benefits of using a non-advised brokerage to secure financial protection for your family.