It is important to understand the level at which the benefits on a severe illness policy will be paid out.
Some policies pay out the full assured amount on diagnosis of a severe illness or injury, whereas others pay out a percentage of this amount that depends on the severity of your illness or injury.
Your premiums will also be influenced by the level of cover you enjoy.
Policies which pay out less than 100% depending on the severity of your illness are said to have tiered benefits.
Tiered benefit policies typically pay out 25%, 50% or 75% of the insured amount.
They are likely to pay you out when your illness is less severe and allow you to make a second claim to top up the initial payment if your illness progresses. For example, you may be able to claim 25% on diagnosis of an early stage cancer and the remaining 75% if your cancer progresses to a late stage one.
Whether your policy has tiered benefits or not, if your claims do not reduce the cover amount, you may be allowed to claim on the policy more than once if you suffer from illnesses that are unrelated – for example, if you have a heart attack and then, a few years later, you are diagnosed with cancer.
This can be useful as advances in medical science have significantly improved our chances of surviving a dread disease, making it is more common for people to recover and succumb to another serious illness.
There are arguments for and against policies that offer tiered severe illness benefits.
For policies with tiered benefits
These policies tend to cover a wider range of health events for which you can claim.
These policies pay out earlier and provide cover when you need it.
If your dread disease cover is an accelerated benefit on your life insurance policies, tiered benefits may be a better bet as if your illness is a low severity you will only be paid a portion of the insured amount and more of your life cover will remain in place to protect your family should you die while the cover is in place. Read more about What does it mean if my cover is accelerated or stand alone?
For policies that pay 100% of the benefit
Most claims are for milder forms of one of the four most common illnesses: heart attacks, heart bypasses, cancer and strokes. If a policy pays out 100% for a lower severity, then you are more likely to be able to claim the full benefit.
Mild episodes of severe illnesses are likely to increase as methods of detecting these illnesses improve.
Mild episodes of a severe illness may still involve increased costs – for example, aggressive treatment of an early stage cancer - and partial payments may not be adequate.
If full payouts are not required, the balance of the payout can be invested for your future financial needs.
The benefits are simpler to understand.
Check out the grid
Most life insurance companies that sell severe illness cover have agreed to provide you, as a potential policyholder, with a standardised disclosure grid that shows how their policies pay out at four defined severity levels for the four main severe illnesses.
The Association for Savings and Investment South Africa drew up a Standard on Disclosures for Critical Illness Products Grid to help you compare the cover on different severe illness policies for the four main diseases: stroke, cancer, coronary artery heart bypass and heart attack.
The fact that life companies show you the grid does not mean that they all use the same medical definitions or pay out at the same levels for the four major illnesses.
It just means they disclose how their own policies would pay out should someone with one of the illnesses at severity levels defined in the grid lodge a claim.
Beyond the different percentage pay outs disclosed in the grid, policies from different companies may differ in the number of diseases covered, the number of payments that can be made, or the premiums that they charge.
Illnesses beyond the four most common ones may be covered at 100 percent or on a tiered basis.
An example of how insurers may disclose the different percentages of the sum insured they will pay at different severity levels for one of the four main severe illnesses.
Can you reinstate severe illness benefits after a claim?
Generally, once you have claimed the full benefit for a specific severe illness, the benefit falls away and no further benefit is available for payment.
However, some life insurance companies allow you to reinstate your severe illness benefits once they are depleted. This is typically only for policies with standalone benefits. (Read more What does it mean if my cover is accelerated or stand alone?)
If an insurer allows you to reinstate your cover after an initial claim, generally this would allow you to claim for a condition for which you have not previously claimed. You would typically not be able to claim again for a condition, or condition within a group of conditions, for which you have already claimed.
For example, if you had claimed for a heart attack, you would not be allowed to claim again for heart-related conditions, but would be allowed to claim for a later diagnosis of cancer.
If your policy allows you to reinstate the cover, the cost of this benefit will be higher premiums when you first take out the policy.
However, the ability to reinstate your cover may prevent you from facing unaffordable premiums on new cover or finding that you are denied cover when you most need it.
Severe illness policies which offer tiered benefit payments based on the severity of your condition may also have a reinstatement option. This may allow further payments for the original condition if your condition worsened.
Reinstatement benefits on these policies are complex and practices vary between companies, so be sure to consult the policy document.
