‘Terminal illness’ is a frightening topic. While many might shy away from it, it is an essential part of financial planning.
It offers a safety net during some of life’s most challenging moments, ensuring that financial burdens don’t add to the emotional strain. In this article, we go into the intricacies of terminal illness insurance, focusing on its relevance to UK life insurance and critical illness policies.
By the end, you’ll have a comprehensive understanding of what this insurance entails, its benefits, and how it stands apart from other insurance types.
Terminal Illness Insurance
Terminal illness insurance is a specific type of cover that provides an early payout if the policyholder is diagnosed with a terminal illness during the term of their life insurance policy.
A terminal illness is typically defined as a condition that is expected to lead to death within a specified period, often 12 months.
This means that if a medical professional diagnoses the policyholder with an illness that is expected to be fatal within the next year, the insurance can pay out early, before the individual’s actual death.
You don’t need to have a mortgage to benefit from this. It’s available on mortgage protection policies and family protection policies.
What it covers
It’s important to understand the specifics of how a policy could pay out.
Here’s a breakdown:
When It Pays Out
The primary condition for a payout is a diagnosis of a terminal illness. However, it’s not just any diagnosis; the life expectancy of the individual must typically be less than 12 months. This means that while someone might have a really severe illness, unless a medical professional predicts a life expectancy of under a year, the insurance is unlikely to pay out.
Typical Illnesses Covered
While the exact list can vary between insurers, terminal illnesses often include conditions like advanced stages of cancer, heart disease, leukaemia, AIDS, kidney disease, and liver disease. It’s essential to check with individual insurance providers for their specific list.
Role of Medical Professionals
A doctor or medical consultant plays a pivotal role in the process. They are responsible for confirming the terminal nature of the illness and the anticipated life expectancy. Some insurers might require a second opinion or further tests to validate the claim.
Differences Between Terminal Illness and Critical Illness Insurance
While both terminal illness and critical illness insurance provide financial support during health crises, they cater to different scenarios:
Terminal Illness Insurance
- Pays out when diagnosed with a terminal illness with a life expectancy of typically less than 12 months.
- Once the insurance pays out for a terminal illness, the policy typically ends. No further claims can be made, and no additional payouts will be provided upon the policyholder’s death.
- Often included at no extra charge in many life insurance policies.
Critical Illness Insurance
- Provides a payout upon diagnosis of one of the predefined critical illnesses in the policy. These illnesses don’t have to be terminal and can include conditions like heart attacks, strokes, or certain types of cancer.
- Depending on the policy, multiple claims might be possible. For instance, a policy might pay out a percentage for a less severe illness and still remain active for future claims.
- Typically comes with an additional premium and can be more expensive than standard life insurance.
Benefits of Terminal Illness Insurance
One of its primary advantages is the provision of financial security. If you’re diagnosed with a terminal illness and can’t work, the payout from this insurance can step in, replacing lost income and ensuring your family maintains its standard of living.
Beyond just daily expenses, there might be mounting medical bills, treatments, or the need for home care services, all of which can be addressed with the funds from the insurance.
In some cases, your illness might necessitate modifications to your home for better accessibility or comfort.
With the knowledge that there’s a financial safety net in place, some of the inherent stress and anxiety of a terminal diagnosis can be alleviated. This assurance allows you and your family to concentrate on cherishing your moments together.
Furthermore, if there are any outstanding debts looming over your family, the insurance payout can be a lifeline, clearing these obligations and ensuring that financial burdens don’t compound the emotional ones during or after the illness.
Things to consider
When considering terminal illness insurance, it’s essential to understand the nuances of the policy and how it aligns with your needs.
One of the first things to note is that not all life insurance policies automatically include terminal illness cover.
The definition of a terminal illness can vary between insurers. Typically, it refers to a condition that’s incurable and expected to lead to death within 12 months. However, the exact list of illnesses and the specifics of the diagnosis can differ. For instance, some insurers might require confirmation from a specific type of medical consultant or even seek a second opinion.
Another vital aspect to consider is the policy’s term. Some policies might exclude terminal illness claims in the final months of the policy. This means if you’re diagnosed with a terminal illness near the end of your policy term, you might not receive a payout. It’s essential to be aware of any such conditions when choosing a policy.
Lastly, while terminal illness insurance provides a safety net, it’s also worth considering other forms of cover, such as critical illness insurance.
What happens to a mortgage when someone dies?
When someone dies, their debts don’t simply disappear. Instead, these debts are usually paid by the person’s estate before any assets are distributed to their beneficiaries. When it comes to mortgages after death, the monthly mortgage payments still need to be made, and if you inherit the property, you will be responsible for making the mortgage repayments.
Common Misconceptions
When it comes to terminal illness insurance, there are several misconceptions that can lead to confusion for policyholders.
Many people believe that once they receive a terminal diagnosis, their insurance will automatically pay out the sum assured. However, the reality is that insurers often require detailed medical documentation and may even seek opinions from their medical consultants before approving a claim. The process can be thorough to ensure the claim is valid.
Another misconception is that terminal illness insurance and critical illness insurance are the same. As we’ve discussed earlier, they serve different purposes. Terminal illness insurance focuses on conditions expected to result in death within a short time-frame, while critical illness covers a range of severe but not necessarily terminal conditions.
There’s also a belief that if someone survives longer than the predicted 12 months after receiving a terminal illness payout, they might have to return the money. This is not the case. Once an insurer approves a claim and provides a payout, the beneficiary doesn’t have to repay it, even if they live longer than initially expected.
Lastly, some think that terminal illness insurance is expensive or comes with additional costs.
In many cases, this cover is included in standard life insurance policies at no extra charge. It’s always a good idea to read the policy details and discuss with the insurer or broker to understand the costs involved.
Remember that mortgages aren’t automatically covered by life insurance. So if you want to protect your mortgage, it’s up to you to buy a mortgage protection policy.
The Impact of Smoking
Smoking has long been associated with a range of health risks, and its impact extends to insurance.
For insurers, the health implications linked to smoking can significantly increase the likelihood of a claim, which in turn affects the terms and premiums of a policy.
When applying for life insurance, insurers will ask about your smoking habits.
This includes not just cigarettes but also other tobacco products and even e-cigarettes in some cases. If you’re a smoker, you will find that your premiums are higher than those of non-smokers. This is because, statistically, smokers present a higher risk to insurers due to the potential health complications associated with tobacco use.
You must always be honest about your smoking habits. Misrepresenting or withholding this information can lead to complications if you or your family ever need to make a claim. In some cases, it might even result in the policy being cancelled.
For those who have quit smoking, there’s good news. Many insurers will consider you a non-smoker if you’ve been tobacco-free for a certain period, often around 12 months. This can lead to reduced premiums and better terms on your policy.
Making a Claim on Your Terminal Illness Insurance
The process of making a claim for a terminal illness can be emotionally taxing, given the circumstances. However, understanding the procedure can make it a bit more manageable.
Upon receiving a terminal diagnosis, the first step is to contact your insurance provider. They will guide you through the necessary paperwork and documentation required. This often includes detailed medical reports and a prognosis from a medical consultant.
While insurers aim to process claims as swiftly as possible, especially in such sensitive situations, it’s worth noting that there will be some waiting time involved. This is because insurers need to verify the claim’s validity, which sometimes involves seeking additional medical opinions.
Once a claim is approved, the payout is typically made as a lump sum. This money can then be used as the policyholder sees fit, whether it’s for medical expenses, financial security for the family, or fulfilling personal wishes.
The Difference Between Joint and Single Cover
You will need to decide whether to opt for a joint or single policy. Both have their advantages and potential drawbacks, and the best choice often depends on individual circumstances.
A joint policy is typically taken out by couples and covers both individuals under a single policy.
The main advantage of this approach is that it’s often more cost-effective than taking out two separate policies. However, it’s essential to understand that a joint policy will only pay out once. If one partner makes a claim due to a terminal diagnosis, the policy will end, leaving the other partner without cover.
On the other hand, single policies cover just one individual. While it is a bit more expensive if both partners take out separate policies, it offers the advantage of two potential payouts.
And if one partner claims, the other’s cover remains unaffected.
Do all policies include terminal illness benefit?
Most life insurance companies include terminal illness cover as a ‘free’ option when you buy a new life cover policy. This would include:
- Level term insurance
- Decreasing term insurance
- Increasing term insurance
- Mortgage term insurance
- Family income benefit
- Whole of life
- Critical illness insurance
You can check whether a policy offers it by looking at the key features illustration or reading the booklet. If in doubt ask for further information.
