Advisers boosted critical-illness cover business when the mortgage market went into meltdown but now that mortage sales are reviving, will CI cover become a casualty or do advisers have a duty to see borrowers are covered?
Some experts argue that the single biggest factor that has kept critical illness cover sales relatively buoyant during the economic downturn has been the interest shown in the product by mortgage brokers unable to earn sufficient income from their core mortgage business.
Many brokers have now been able to trawl through their client bases and sell to homeowners they never found time to discuss the product with when the mortgage market was booming.
Such conversations have often gone well beyond mere mortgage protection and resulted in policyholders taking out cover to protect their families’ general lifestyles as well.
Nevertheless, now that the mortgage market is finally picking up it is essential that critical illness cover doesn’t get relegated to the backburner once again.
But that’s exactly what many are concerned is happening once again.
A basic responsibility
Aviva protection distribution director Louise Colley was speaking to a big broker that used to be able to claim that 60 per cent of its customers had protection with their mortgages.
However, due to the time pressures created by dealing with more mortgage business, this proportion has plummeted to around 15 per cent for new business.
“Some mortgage brokers consider mortgage protection as integral and others tend to focus purely on the mortgage transaction and don’t go deeply around the products associated with it,” she says.
She argues that they could do far more and that they have a duty of care, especially when the borrower is making what is often the biggest purchase in their life.
“As far as I’m concerned selling critical illness cover is a basic responsibility of a mortgage broker,” she says.
”It frustrates me when people say it’s too complex because mortgages are just as complex as protection, so there are no excuses. Do you really want to be a mortgage broker who gets a phone call from a client you felt the issue was too complex to discuss with saying that their husband has got cancer and asking if he had critical illness cover in place?”
From a purely financial perspective brokers should also be viewing critical illness cover as a valuable additional revenue stream as opposed to simply a replacement for mortgage business.
Initial commission is typically one and a half times the first year’s premium and, with the average premium for mortgage protection purposes around £500 a year, this is surely not to be sniffed at.
Not what it once was
The product, which pays out a tax-free lump sum if the policyholder is diagnosed with one of a stated number of serious conditions, used to be severely tainted by the much publicised fact that insurers declined one in five claims but things have now well and truly moved on and the latest figures produced by the Association of British Insurers show the average pay-out rate to be 92 per cent.
The progress has resulted primarily from guidance issued by the ABI in 2008 about dealing with non-disclosure more fairly and from a more scrupulous stance taken by insurers at the application stage. In short, policyholders who disclose everything they are required to at the point of application are highly unlikely to come unstuck when they make a claim as long as they fall within the policy definition for the condition in question.
Most good products cover around forty conditions, and these will always include cancer, which already accounts for around two thirds of all claims and is only likely to increase in importance in the light of the June 2013 revelation from Macmillan Cancer Support that by 2020 very nearly half the UK population will get cancer during their lifetimes.
Good policies will also cover heart attack, stroke, multiple sclerosis, benign brain tumour, kidney failure, major organ transplant, coronary artery bypass surgery, heart valve replacement and total permanent disability.
Furthermore, they will pay out a proportion of the sum assured if one of the policyholder’s children is diagnosed with a critical illness.
Nevertheless, the product should never be seen as offering “catch-all” cover that can safeguard against being unfit to work. In particular, it will not cover stress/mental health problems or bad backs – apart from the very small minority of cases that are sufficiently serious to qualify as TPD.
As back and stress/mental health problems are two of the major causes of workplace absenteeism, anyone seeking mortgage protection specifically against loss of earnings should first be considering income protection, which pays a regular income if the policyholder is unable to work due to ill-health or disability. Many people in fact already have this cover through the workplace. Unlike critical illness cover, income protection does not require policyholders to suffer from stated conditions but pays out if they are unable to work at the end of an initial deferred period – typically of three or six months.
Ideally, critical illness cover should be taken out in addition. It can then be used for purposes such as having a holiday to recuperate or making adaptations to the home that have become essential as a result of the person’s illness. But in cases where homeowners are unable to obtain income protection, either because they are declined or because they feel they can’t afford it, critical illness cover can at least make a reduction in income easier to cope with by paying off the mortgage if the policyholder is in fact diagnosed with one of the stated conditions.
CI on a budget
There is also a growing realisation that there is still a strong case for having critical illness cover even if a policyholder can’t afford to cover the entire mortgage with it.
“We are noticing that our advisers are very keen to introduce a bit of critical illness cover with mortgages, even if it is for less than the life cover sum assured,” says Bright Grey and Scottish Provident senior product development manager Jennifer Gilchrist.
”It’s all to do with budgeting, and although the approach has always been there, we are seeing more interest in it now. We are being asked for more support material that demonstrates the virtues of taking a little critical illness cover with life cover.”
There is also growing interest in taking out critical illness cover arranged on a family income benefit basis – which pays a regular income during the mortgage term rather than a one-off lump sum. This can work out significantly cheaper than standard lump sum cover and some experts also feel that it’s conceptually more appealing for mortgage protection.
Legal & General distribution director Martin Noone says people often get carried away and think that lump sum critical illness cover is better than family income benefit. But his view is that family income benefit can be far more valuable over the mortgage term and also far more appropriate as it covers the essential outgoings.
”It’s far easier to dwindle away a lump sum when it’s sitting there by spending it or investing it in things that are inappropriate,” he says.
Nevertheless, critical illness cover remains a very fast moving field in terms of both generic developments in the marketplace and of individual insurers tweaking their own product ranges.
This summer there have been significant product revamps from LV=, Aviva and Zurich.
For brokers who are members of a network, the selection process can be easier as they are likely to be restricted to a panel of suitably vetted insurers. Otherwise the task of keeping tabs on what the entire market is doing can be highly labour intensive.
So brokers need to establish whether it is worth investing their own time in ensuring that they keep abreast of developments or whether they might not be better off recruiting a member of staff with specialist knowledge, and getting all staff to pass critical illness business onto them, or outsourcing to a specialist intermediary.
As the old saying goes, anything worth doing is worth doing well – and that’s certainly the case with South Lanarkshire-based Net Worth Planning adviser Paul Doyle.
He specialises in mortgages and protection and feels that anyone seeking to be up to speed with critical illness cover should be doing at least two cases a week and spending a further four to six hours a month keeping on top of the market.
A way that works for him is to select a single insurer to use for the majority of straightforward cases and only seek quotes elsewhere for more complex cases.
Nevertheless, the insurer of choice, which is currently Bright Grey, is reviewed at least twice a year via a thorough market review involving around eight leading insurers.
“Bright Grey is good at constantly revamping and modernising its product and making it attractive, its claims history is very good and its marketing material and freshness of approach have made it especially attractive to the younger generation,” he says.
”It ‘s always there or thereabouts on rates for critical illness cover and, yes, you could sometimes save a few pounds a month going elsewhere, but it can still be much better value for money in terms of its illness definitions and added-value features. So I put about 70 per cent of my mortgage cases with it.”
Alternatively, those who feel that it is essential that the whole market is brokered each time could consider forming a relationship with a specialist intermediary.
For example, Henrietta Oxlade, a protection expert with City based independent financial adviser Radcliffe & Newlands, is generally prepared to do 50/50 commission splits with mortgage brokers and, because she doesn’t do mortgage business herself, can do a full financial review without the introducers worrying about her taking other business off them.
“In my opinion unless you are expecting to write at least two critical illness cases a month you are probably better off outsourcing to a specialist,” she says.
She says introducers can get money for doing very little and the client benefits from having a whole-of-market expert who knows which companies are good at underwriting certain issues.
Some insurers, for example, take more generous attitudes towards family histories and may not impose a premium loading when someone’s mother has died of cancer, whereas others may.
“A lot of mortgage brokers who just use a small panel of three or four protection providers can leave the client disadvantaged,” she says.
”Some of the quirkier and more modern insurers like PruProtect and Ageas Protect may not be on these panels and can be the best option in certain cases. Pulse Insurance is also very good for non-standard cases on critical illness cover.”
Partial payment facilities
PruProtect’s Serious Illness Cover is in fact so different that it is not officially classified as critical illness cover. Its ‘severity based’ approach pays out for a far wider range of conditions than a standard policy (161 on its Comprehensive plan and 100 on its Primary plan) but only pays a fraction of the sum assured for the less serious conditions.
But the fact that in some cases, such as certain definitions of heart attack, policyholders could receive less than they would for a condition that triggers a claim under a standard policy has led some experts to question its suitability for mortgage protection. Others, on the other hand, have no problems with it in this respect.
Sarah Fullaway, director of Oviso, a Derby based intermediary specialising in protection, says she has no issues at all with recommending PruProtect for mortgages because although you may only get a proportion of the sum insured this can be used to reduce the mortgage.
”You should still be able to service the mortgage, as eventually you should be well enough to work, but if the illness progresses you should get further pay-outs under the severity based approach,” she says.
“I always compare PruProtect’s Serious Illness Cover with car insurance, where you don’t expect to receive compensation for a complete write-off just because you’ve broken the windscreen. But we don’t do a huge amount of business in it as it’s expensive, so we tend to do more with quality providers like Ageas Protect, LV= and Friends Life.”
Many standard critical illness providers have copied PruProtect to an extent by introducing “partial payment facilities,” which pay out only a fraction of the policy sum insured for stated milder conditions not covered under the main policy – but do not normally reduce the sum insured as a result.
Recent research by Defaqto shows that the number of policies offering severity-based cover has increased to 59 per cent from only 14 per cent at the end of 2009. It also shows that the range of conditions covered by severity-based clauses has increased from just 10 in May 2012 to 30 this May.
Since this July, when Zurich became the last one to do so, all adviser-supporting insurers now offer some partial payment facilities. The most common of these are for early stage breast cancer and prostate cancer but they can also include everything from Crohn’s disease and ulcerative colitis to cardiovascular related conditions.
Dealing with the big C
Protection Review chief executive Kevin Carr says that based on the training he does with advisers, the single biggest issue in the critical illness market is early-stage cancer. ”Cancer accounts for around two thirds of critical illness cover claims and is the reason that the public is fundamentally interested in the product,” he says.
”So for me the ability to pay out for early stage cancer is more important than whether the entire mortgage is protected.”
The wordings of these partial payment facilities can differ significantly from one insurer to another, as can definitions of the core policy conditions. Although the ABI has guidelines requiring its members to at least adhere to minimum wording standards for the latter, recent years have increasingly seen insurers competing furiously with each other to produce “ABI plus” definitions that go over and above these.
Other features that warrant due consideration are the ability of some insurers to offer discounts when they impose exclusions for certain conditions or to offer added-value point of claim services.
For example, Ageas Protect and Friends Life include the Best Doctors second opinion service whereas Avvia, Bright Grey and LV= provide services offering practical and emotional support via personal nurse advisers. The first two do this via the RED ARC whilst LV= uses FirstAssist.
Oviso’s Sarah Fullaway says “The money payment made by a critical illness policy is great but most people with RED ARC do use it if they have a claim because when someone has a critical illness they usually need someone to talk to. So I think considering features like this is the difference between good and bad advice.”
A new service called CIExpert (see Box 1) has now become available to help brokers who choose to keep their critical illness recommendations process in house to evaluate the impact of all these various considerations.
Defaqto’s Star Ratings service, which is less comprehensive but free, also takes into account a whole plethora of product criteria, awarding critical illness policies ratings of between one and five stars based on their feature quality and comprehensiveness.
Also worthy of consideration for those seeking help with protection products generally is Defaqto’s Engage database which can streamline research processes, standardise workflows and outputs and help reduce compliance risk by providing a clear and robust audit trail. The protection-only module is available for £25 a month (plus VAT) or can cost £35 a month (plus VAT) if combined with the general insurance module.
NEW AUTOMATED EXPERT COMPARISON SERVICE NOW AVAILABLE
CIExpert, launched in March 2012, has provided mortgage intermediaries with a commendably reliable and affordable set of tools to rapidly identify the most suitable plan for any one individual.
The brainchild of Alan Lakey, partner at Highclere Financial Services, a specialist adviser based in Hemel Hempstead in Hertfordshire, CIExpert is the product of three years of detailed research, and has been receiving excellent feedback from insurers and intermediaries. A year’s membership normally costs £280 (+VAT),although it is possible to join for six months for £160 + VAT) or for three months for £90 (+ VAT). Potential users can also test the water through a one day free trial.
“CIExpert is very good for choosing from a number of insurers and I would recommend it wholeheartedly,” says Ageas Protect head of marketing and propositions Steve Casey.
”It rewards quality and I would encourage all brokers to use it, especially as it comes at an affordable cost.
“It can cut out a lot of the comparative work for you because it alters the weight it gives to various factors because of a policyholder’s age. There is no real need for intermediaries to bother with issues like partial payment facilities and ABI plus definitions when they can get CIExpert to do all the work for them.”
The system compares all critical illness plans available on the market, including ones that don’t sell through intermediaries like those offered by HSBC, Scottish Widows and Beagle Street. It does not, however, include PruProtect’s Serious illness Cover as this is not technically a critical illness policy and cannot be easily compared.
“It’s important for intermediaries to know what they are up against in terms of direct plans as clients might ask about them,” syas Lakey.
”For example, Scottish Widows sells trunk loads of policies through Lloyds and Halifax but offers only mediocre cover. Its conditions haven’t been updated for five years.”
Intermediaries simply enter a client’s name, age, date of birth, required sum assured, smoking habits and whether or not they want children’s cover included. They then press a button and will find all 16 available insurers ranked in terms of highest and lowest score. Two of these can then be selected for like-for-like comparison by ticking boxes next to them.
“It is popular with mortgage intermediaries,” continues Lakey, “and can prepare an audit trail report for the company you finally select as it will show you a list detailing where it has advantages. It also offers intermediaries the ability to use it as a new business tool as it compares new plans with all historic plans in place, which can enable them to contact relevant people in their client bases.”
The Tenet network is already happy for CIExpert to be offered to its members at a 20% discount for a one year membership and Lakey is confident of having several more networks on board by the end of the year.
CASE STUDY: PAYING OFF THE MORTGAGE PROVES CRUCIAL FOR HEART ATTACK VICTIM
When 46 year old driving instructor Marti Trujols experienced strong chest pain while driving from one lesson to another last November he ended up spending five days in his local hospital’s A&E department, after being diagnosed with a heart attack.
After having two stents fitted during the following fortnight, he has gradually been easing himself back into his job, working on a part-time basis whilst attending cardiac rehab sessions at the hospital twice a week. He is not expecting to be working full time again for another six months.
But, fortunately, his situation has been made easier by the fact that the mortgage on his semi-detached three bedroom home in Wednesbury, near Wolverhampton, has been paid off by a critical illness policy taken out with Aviva in 2005. Although his 46 year old wife Joanne works as a school administrator, providing for their two kids – Lidia, aged 11, and Pau, aged 7 – would have otherwise been a real struggle.
“Because the mortgage has been taken care of I don’t have to worry about only working part-time, which is helping my recovery,” says Trugols.
”My first thought when I learned I had suffered a heart attack was to wonder how was I going to pay for the mortgage because it took me two or three weeks to remember that I had taken out a critical illness policy. The doctors had told me not to worry but to talk to the mortgage company to see if they would freeze the payments for a while to help me get better.
“I admit that when I remembered I had the policy I was nervous as to whether or not I would get paid as I had heard so much negative news about critical illness cover. But the mortgage was paid off within six weeks from the time I put in my claim. Having to have moved to a smaller or rented property would have been incredibly stressful whilst I was ill, not just in terms of the buying and selling process but also because of having to find new schools for the kids.”
The Aviva decreasing term accelerated life and critical illness policy, bought via West Bromwich Building Society, was taken out on a joint-life basis with Joanne. With an initial sum insured of £97,000 and a policy term of 25 years, it cost the couple a total premium of £84.84 a month.
Marti is adamant that any mortgage adviser who doesn’t mention critical illness cover isn’t doing their job properly as serious illness can strike anyone. He had been quite healthy in his lifestyle, being a teetotaller, a keen cyclist and taking care to eat fairly sensibly.
“It can take people several years to recover from a critical illness and some never work again, so I consider myself to have been very lucky,” he says.
”If anyone is wondering whether or not to take out critical illness cover I would urge them to do so as you never know what will happen in the future.”