‘It makes sense to link the payment to the severity level’
Partial payouts for severe illnesses at lower severity levels help ensure that you have cover when you need it, Discovery Life, one of the leaders in life policies with tiered benefits, says.
Kenny Rabson, Discovery’s head of research and development, says Discovery’s claims experience is very different to that of Old Mutual.
He says the first severe illness claim lodged by a Discovery policyholder tends, on average, to be at a severity level that warrants a claim at 70 percent to 75 percent of the insured amount.
Rabson says Discovery is of the view that if you claim for an illness at a low severity level, you do not need a large payout, because your recovery is usually complete and the impact on your lifestyle is negligible.
The severity-based approach also takes cognisance of the fact that medicine and medical technology have advanced, resulting in many people recovering completely from severe illnesses.
For example, he says, where breast cancer is diagnosed at an early stage, prognosis is excellent and often accompanied by full recovery.
However, if a medical condition is more serious than initially anticipated, policies with payouts based on the severity level of your claim allow you to claim for a top-up benefit.
He says the other important factor that the severity-based policies acknowledge is the likelihood that you may suffer more than one illness over your lifetime and so need to be able to claim for each illness. Severity-based products allow you to claim multiple times until your benefits are exhausted, and if you reinstate your policy benefits, you can claim more than the amount for which you initially insured yourself.
Rabson says assurers who offer tiered benefits have different rules on reinstatement, but Discovery policyholders who have purchased cover at inception of R1 million have, as a result of multiple claims and reinstated benefits, enjoyed cover for up to R3 million, whereas traditionally the benefits would have been capped at R1 million.
Discovery allows you to reinstate cover for subsequent claims in “the same disease process” – that is, a claim related to a previous one.
Rabson says your subsequent dread disease claims are likely to be related to your previous claims and, under traditional dread disease products, you would not be able to insure yourself for that illness or related ones after a claim.
The cost of allowing you to reinstate your cover is built into the premiums you pay when you take out the policy, Rabson says. This prevents you from facing a significant premium increase when your cover is reinstated, which would have made the cover unaffordable or unavailable when you most need it.
Rabson says many South Africans have dread disease cover and lump sum disability cover as an accelerated benefit on their life policies, and if they are paid out in full on the first claim for a severe illness, it has a significant impact on their life and disability cover.
If dread disease and disability cover are offered as an accelerated benefit on a life policy, it means the same insured amount covers you for severe illness, permanent disability and death. A claim for either dread disease or disability will deplete (partially or completely) the benefits that will be paid when you die.
Cover as an accelerated benefit is cheaper than a stand-alone policy.
By offering tiered benefits, a life assurer is able to offer cover for the whole of the body rather than just cover for, for example, the four main dread diseases, Rabson says. Taking cover for any less than the whole of the body is like playing the lottery, he says, because you do not know which illness you may get in future.
BEYOND THE BIG FOUR
Rabson says he is concerned that choosing a policy on the basis of the four standardised medical conditions only could result in the significant mis-selling of dread disease cover.
For example, a client who was sold cover purely for the four main illnesses but who contracts rheumatoid arthritis may have a significant shortfall in protection.
The definitions of the four main illnesses may now have been standardised, but there are significant differences in the definitions of other illnesses, Rabson says.
If you focus only on the standardised definitions of the four main illnesses, you may also miss other features of a product, he says.
For example, Discovery offers a benefit that can boost your payout on a particular claim to 200 percent of the sum assured in more serious cases of a severe illness. Discovery examines the impact of four lifestyle factors before enhancing the payout beyond your sum assured.
The impact of this benefit may not be apparent from the standardised disclosure of how an assurer will pay out for the four major illnesses, Rabson says.
If you look solely at the standardised disclosure of the four main illnesses, you may also miss other features in dread disease products, such as multiple claims, cover for your children and parents, and the ability to be treated offshore if the treatment is not well enough established in South Africa.
Rabson says most brokers have switched their clients into policies that pay out based on the severity of the illness because intuitively these products make more sense.
He denies that more policyholders have severity-based products because the premiums are cheaper. He says Discovery’s policies are not always cheaper, as they often cover more illnesses than other policies and allow claims for multiple illnesses.