Known as critical illness cover, living health insurance, or dread disease cover, this insurance provides a lump sum payment to the insured upon diagnosis of a severe illness. Introduced in South Africa in 1983, this coverage emerged in response to advancements in medical science, which enabled many individuals to survive previously fatal conditions. Initially, severe illness insurance addressed the most prevalent diseases, including cancer, stroke, and heart attack. However, over the past few decades, insurers have refined and expanded their product offerings to encompass a wider range of illnesses and varying degrees of severity. Consequently, these products have become increasingly comprehensive and complex, posing challenges for policyholders in fully understanding the terms and conditions.
What diseases does it cover?
Reputable insurers typically cover cancer, heart attack, stroke, and coronary heart bypass graft as a minimum, as these conditions represent approximately 80% of all dread disease claims. Additional diseases that may be included in coverage are kidney failure, aplastic anaemia, muscular dystrophy, motor neuron disease, Alzheimer’s disease, Parkinson’s disease, dementia, and infective meningitis. To fully understand the scope of your policy, it is essential to review the list of conditions provided by the insurer prior to applying for coverage.
How much cover do I need?
Determining the appropriate level of cover for severe illness is not an exact science. When assessing your needs, consider your existing medical aid coverage, the comprehensiveness of your gap cover, whether you have an income protector, and if you possess lump sum disability insurance. Each of these additional benefits should complement your dread disease cover, collectively minimizing your financial risk in the event of a severe illness. A thorough evaluation of these factors will help ensure adequate protection.
Do I need dread disease cover if I have disability insurance?
It is essential to recognize that your capital disability and income protection benefits fulfil distinct roles within your risk portfolio. An income protection benefit is designed to replace lost income resulting from either temporary or permanent disability. Conversely, lump sum disability cover is often established to facilitate debt repayment in the event of permanent disability. Severe illness cover serves a different purpose by offering additional financial support for costs associated with your illness that may not be covered by medical aid or gap cover. This includes unforeseen expenses such as home or vehicle modifications and wheelchair purchases, among others.
How does my cover increase over time?
The answer depends on your policy structure. Ideally, your severe illness benefit should increase annually with inflation, ensuring its value remains intact over time. This approach guarantees that should you need to claim, your payout will retain its real value, effectively protecting your financial interests.
Do I need a separate policy, or can I add it to my existing life policy?
If you already have a life cover policy, you can incorporate severe illness cover as either a standalone or accelerated benefit, depending on your financial objectives. Conversely, if you do not have life cover and do not require it, you may opt for a standalone severe illness policy instead.
What happens if my illness is not on the list of conditions covered?
If you are diagnosed with an illness that is not listed, you will need to determine whether your policy includes a ‘catch all’ clause. This clause is designed to ensure you are covered for any disease which permanently affects your health and your ability to function on a daily basis.
Does the benefit payout on diagnosis?
The payout structure largely depends on the type of severe illness policy you hold. Older policies typically provide a lump sum payment upon diagnosis of one of the specified conditions. In contrast, newer products often feature tiered benefits, with payouts based on the severity of the illness. For example, a diagnosis of stage 1 cancer may result in a 15% payout of the total benefit. If the cancer progresses to stage 2, an additional 25% of the benefit may be disbursed, and this tiered approach continues for more advanced stages of the disease.
How will I be taxed?
You will not be taxed on your severe illness payout. All payments made to you from your policy will be tax-free.
Once I claim, does the cover fall away?
This depends on whether your product is structured as a stand-alone or accelerated benefit, and whether your policy includes a reinstatement benefit. Generally speaking, if your severe illness cover is structured as an accelerated benefit on your life policy, your life cover will reduce in line with your claim, and no benefit will be reinstated. However, some standalone benefits are structured so that, after you claim, your cover can be reinstated allowing you to claim in future for an unrelated illness.
How long does the cover last?
In the past, severe illness cover terminated at age 65. However, most insurers now provide you with the option to select whole-of-life cover which means that your benefit continues for as long as you are alive and paying your premiums timeously.
How much does it cost?
Each individual applying for dread disease cover undergoes underwriting by the insurer before receiving a final quote. The premium is determined based on the risk you present to the insurer. Factors considered during this assessment include your age, health status, pre-existing conditions, smoking habits, family medical history, and socio-economic factors. The underwriters will evaluate your overall risk and subsequently calculate an appropriate premium based on these considerations. This comprehensive assessment ensures that the policy is tailored to reflect your unique risk profile.
How will my premiums escalate?
When you take out your cover, you can choose a premium pattern that suits your needs. Most insurers offer level premiums, compulsory premiums, and age-rated premiums, all of which serve a different purpose depending on your specific needs. What is important is to choose a premium pattern that is affordable both now and into the future, so ideally speak to an independent advisor who can assist you in selecting an appropriate premium structure.
What are activities of daily living?
In assessing a severe illness claim, particularly where there are tiered benefits in place, some insurers use an internationally recognised scoring system to measure the patient’s physical, mental and functional ability and the extent to which it has been affected by the disease. In doing so, they will ensure that the claims payout matches the financial impact that the illness has had on the patient’s life.
Are there any waiting periods?
Yes, your policy document should set out the various waiting periods that are applicable to you. Firstly, you may be subject to a waiting period during which your policy is active, but you are not permitted to claim from your policy. Secondly, your policy may include a minimum survival period which must pass before your claim is eligible for payout. Normally, a minimum survival period is between 14 and 28 days, following which your claim will be paid.
Are there any exclusions?
Most insurers include a list of general exclusions on their policy documents including suicide attempts, self-inflicted injuries, or illness relating to drug or alcohol abuse. Then, your insurer may also impose specific exclusions depending on the outcome of your underwriting. As a result, it is vital that you check your policy wording before agreeing to the terms of the cover.
Have a wonderful day.
Sue
