Insurance and re-insurance firms are having "bad claims experience" with serious illness policies and the consumer is about to pay the price, writes Laura Slattery
"It could be you" is a marketing slogan lottery firms use to convince consumers to part with cash. Life assurance companies selling serious illness policies use the same message, this time playing on fears rather than hopes. But despite the unsettling statistics, brochures for serious illness cover are not completely laden with gloom. "It" - cancer, heart attack, stroke or other critical illnesses - could happen to you, they say, but you could survive.
More and more people are surviving, living for longer than the 14-day deferred period specified on most policies and taking the lump sum to which they are entitled under their serious illness policy, if they have one.
The bad news is that insurance and re-insurance firms are having what is known as a "bad claims experience" with serious illness. From the new year, this will be passed on to consumers in the form of a "bad premiums experience", or a threatened price rise on new policies.
Irish Life has written to brokers warning that "rates will definitely be increasing across the board and it is likely that these increases will be significant". Canada Life, meanwhile, is expected to withdraw serious illness cover from new mortgage protection policies from December 31st.
Other players such as Hibernian, Friends First and BoI Life may also either review premiums or redesign their serious illness offerings in the first quarter of next year.
"That's the message we're giving out to our clients about serious illness when they're buying other products," confirms Mr Brendan Spring, chief executive of FBD Investment Services. "We expect premiums to increase by up to 50 per cent for most serious illness policies and we have notified our clients in advance. Either they go with it or they don't."
So what are the merits of going with it, being a price-conscious consumer, and taking out a serious illness policy now, before the new rates kick in?
A lot of people happily ignore the product completely, dismissing it as just one more form of private insurance on top of a whole raft of other expensive insurance products. Still more people decide that, if illness means they have to give up work before retirement age, they can reasonably expect to live off a combination of financial support from their partner, work-related sick pay, and statutory Disability Benefit. They may opt to plough any disposable income into their pension instead.
The new business market for serious illness or products containing a mix of life and serious illness cover was valued at €42 million in 2001, according to figures from the Irish Insurance Federation. So, clearly, there are those who consider the product to be an attractive layer of protection against the added burden of financial hardship should they become ill at an early age.
Serious illness cover works by paying out a tax-free lump sum on diagnosis of conditions listed by the insurance firm. Policyholders are advised to insure themselves for around five times their net income. Some consumers opt for serious illness cover as part of their life assurance policy, others buy it as an add-on when taking out mortgage protection insurance or on a stand-alone basis.
A man aged 30 can buy serious illness cover worth €100,000 for around €30 a month. For a woman aged 30, premiums can be €7 or €8 higher, because women are more likely to suffer from a serious illness at a younger age. By the time people reach their 50s, the cost per month for women will be less than that for men, but premiums for both sexes taking out new policies will have skyrocketed to more than €150 a month.
Like life assurance, serious illness can be bought as a whole of life policy or for a fixed term. For most people, term assurance is the recommended option, because the amount people need to insure themselves for will change during their lives, as children grow up or as mortgages are paid off.
Traditionally, a 20-year guaranteed term contract for serious illness has meant that the premium price paid is fixed throughout the 20-year term.
On that basis, if someone was thinking about taking out a serious illness policy, now might be the time to do it - the "saving", or rather the protection from the threatened price rise, would last not just for one year, but for the length of the policy.
From next year, insurance companies might not be so quick to guarantee premiums for 20 or 25 years. Instead, what is likely to be on offer are reviewable or unit-linked policies, where premiums can be changed at regular intervals such as every five or 10 years. Buying a guaranteed product now could protect the consumer from further increases beyond the expected rise in 2003.
Those who already have guaranteed-term cover are protected from any price increases, but that would not extend to those with whole of life cover.
"The major change that has been spoken about is the change in rates on term products," says Mr Philip Delaney, director of Simply Life and Pensions. "Whole of life cover does not have guaranteed rates and the likelihood is that these will go up in line with the increases on term products. People will have to accept that under the terms of the policy."
Mr Delaney believes that opting for serious illness cover under a mortgage protection policy is a worthwhile form of security. It will pay off the mortgage on either death or the diagnosis and certification of a prescribed serious illness, whichever happens first. The benefit decreases over the term of the contract in line with outstanding amount owed on the policyholder's mortgage. With personal serious illness cover, it's more a case of "nice if you can afford it", he adds. Mr Paul O'Neill, managing director of Cork-based insurance intermediary J.P. O'Neill, recommends both a mortgage protection policy and a separate personal policy. "People think they have serious illness insurance at work already and they don't," he says. What they may have is income protection insurance as part of a group scheme, paying a taxable monthly benefit after a certain period if the person is unable to work due to ill health.
Most people don't take any notice of rate increases, especially coming up to Christmas, says Mr O'Neill, but anyone taking out a policy now should opt for one that is index-linked, convertible and with a guaranteed premium fixed for the length of the term.
The initial premiums on a reviewable policy are lower, but if a review takes place after 10 years, from year 11 the policyholder could face much higher premiums. At the moment, while consumers still have a choice they are "out of their mind" to be choosing a reviewable policy over a guaranteed fixed premium product, Mr O'Neill says. "It defeats the purpose of taking out a policy now."
Insurance brokers believe serious illness cover will survive in the long-term. "We see it as important, if not more important, than life cover," says Mr Spring of FBD Investment Services.
"In the past, people became seriously ill and then they died. Now people are still suffering from these illnesses, but they recover and live for longer afterwards."
Mr Spring describes the future of serious illness as "robust" despite the expected premium increases.
"You need to sit down and be advised," he adds. "You wouldn't just buy this off the page."
