Dread disease cover: Your questions answered

Also known as critical illness cover, living health insurance or dread disease cover, this type of insurance is lumpsum cover that is paid to the insured on diagnosis of a severe illness. This form of insurance was launched in South Africa in 1983 when it became obvious that many people, previously dying from illnesses, were now surviving and living with their illnesses – thanks to huge enhancements in medical science. In its earliest form, severe illness insurance covered the most common diseases, being cancer, stroke, and heart attack. But, over the past few decades, insurers have adapted and improved their product offerings to cater for more illnesses and levels of severity. As such, products are now more comprehensive, increasingly complex, and somewhat difficult for the pay person to understand.

What diseases does it cover?

Most reputable insurers provide cover for cancer, heart attack, stroke, and coronary heart bypass graft as an absolute minimum, keeping in mind that these diseases account for around 80% of all dread disease claims. Other diseases that your insurer may cover include kidney failure, aplastic anaemia, muscular dystrophy, motor neuron disease, Alzheimer’s disease, Parkinson’s disease, dementia, and infective meningitis. But the only way of knowing exactly what your policy covers is to check the list of conditions provided by the insurer before applying for cover.

How much cover do I need?

There is no exact science when it comes to determining what level of cover you need. When determining your need for severe illness cover, you should also consider what level of medical aid coverage you have, how comprehensive your gap cover is, whether or not you have an income protector in place, and if you have lumpsum disability in place. All these additional benefits should work together with your dread disease cover to reduce your financial risk in the event of a severe illness.

Do I need dread disease cover if I have disability insurance?

Remember that your capital disability and income protection benefit generally serve a specific purpose in your risk portfolio. An income protection benefit is intended to replace any income that you have lost as a result of temporary or permanent disability. When it comes to lumpsum disability cover, many people put this in place to ensure that they are able to pay off debt in the event of permanent disability. As such, severe illness cover serves a different purpose – which is to provide additional financial assistance to cover the costs associated with your illness that are not covered by medical aid or gap cover, or which cannot be foreseen, such as home or vehicle modifications, wheelchairs, etc.

How does my cover increase over time?

That depends on how you have structured your policy. Ideally, you should ensure that your severe illness benefit increases annually in line with inflation. This will ensure that the value of your benefit will not reduce over time and that, if you ever need to claim, your payout has held its value in real terms.

Do I need a separate policy, or can I add it to my existing life policy?

If you currently have a life cover policy in place, you can add severe illness cover to your policy either as a standalone benefit or an accelerated benefit, depending on your financial goals. If you don’t have life cover in place and have no need for life cover, you can take out a standalone severe illness policy.

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 pay out on diagnosis?

Again, this depends on the type of policy you have in place. Generally speaking, the older severe illness policies will pay out a lumpsum if you are diagnosed with one of the listed conditions. However, the newer products provide for tiered benefits where the pay outs are percentage-based depending on the severity of the disease. For instance, if you are diagnosed with stage 1 cancer, the policy may pay out 15% of your benefit. If the cancer progresses to stage 2, they may pay out a further 25% of the benefit, and so on.

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.

What can it be used for?

Your tax-free payout can be used for anything you choose. Generally speaking, those who receive severe illness payout use the funds for:

  • Lifestyle modification such as wheelchair ramps, vehicle adaptations, bathroom modification, lift installations, etc.
  • Wheelchairs, walking aids and medical appliances
  • Rehabilitation and therapies not covered by medical aid
  • Alternative healthcare therapies not covered by medical aid
  • Wigs and other costs associated with cancer and/or chemotherapy
  • New drugs or therapies that are not yet approved by medical aids
  • Therapies and drugs that are not listed on your medical aid’s programme or formulary
  • Travel and accommodation costs if you need to travel to receive treatment
  • Childcare and au pairing costs while you are recuperating
  • Home care and private nursing

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?

Every person applying for dread disease cover will be underwritten by the insurer before receiving a final quote for the cover. Your premium will be calculated based on the risk that you pose to the insurer. In assessing your application, they will consider your age, your health status and any pre-existing conditions that you suffer from, your smoker status, your family’s history of disease, and other socio-economic factors. Their underwriters will then assess your overall risk and calculate an applicable premium.

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, and 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.

I have an old dread disease cover policy in place. Should I replace it with a newer product?

Older generation dread disease policies are designed in such a way that they pay out the full amount on diagnosis, which means that your payout is not relative to the severity of your disease – but rather on the occurrence of an event. New generation policies are generally based on the tiered system where claims are assessed in relation to the severity of your diagnosis. Be cautious of replacing any severe illness cover before seeking the advice of an independent financial advisor who has experience in this field.

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