Critical & significant illness cover explained
Relevant life | critical illness cover | significant illness cover
Relevant life has been very popular for a long time with company directors and contractors alike as even though the policy would be paid to their family upon death or terminal illness, it could be offset against the company as a business-related expense and therefore fully tax-deductible.
As brokers and advisers, we welcomed the new product as it meant that we could offer a much more in-depth level of cover for our clients still in a very tax-efficient way. However, other more competitive insurance providers were quick to rush to the HMRC on the use of CIC in a Relevant Life Policy, which quite quickly led to a review.
Regular relevant life policies are not treated as a benefit in kind, however, when critical illness cover is added to this it created tax and legal implications that couldn’t be worked out. This led to Aviva pulling their CIC cover from a relevant life policy. Critical illness cover in a relevant life policy was replaced by what is now known as ‘Significant Illness cover.’
For the lucky few clients who managed to secure a Relevant Life policy with critical illness cover before the product was removed, they have still been allowed to keep those policies in force, which I think is a good example of the regulator acting fairly in what is a complex set of taxation rules.
So, what is Significant Illness Cover?
Significant Illness Cover lists fewer illnesses, and most of them are far more serious than simple critical illness cover that had been offered previously.
The illnesses covered are:
- Advanced cancer
- Aplastic anaemia
- Bacterial meningitis
- Benign brain tumour
- Benign spinal cord tumour
- Brain injury due to anoxia/hypoxia
- Devic’s disease
- Intensive care (ten days)
- Kidney failure
- Liver failure
- Major organ transplant
- Motor neurone disease
- Multiple Sclerosis
- Parkinson’s plus syndromes
- Psychosis and bipolar affective disorder
- Pulmonary arteria hypertension
- Respiratory failure
- Severe heart condition
- Spinal stroke
- Systemic lupus erythematosus
- Third-degree burns (20% coverage)
- Traumatic brain injury
- Total and permanent disability
It is also essential to note that two new conditions were added to the policy.
- The insured must not be able to return to work after the illness
- The insured must not be able to perform at least three of their previous work functions.
These seem like very broad statements, so let’s take a closer look at them/
1. The statement ‘not be able to return to work’ is very general and would lead you to believe that this means the insured could not return to work in any capacity. This is not the case, for example:
Mr Jones currently works five days a week as a company Director.
His job includes going out to meet customers and attending meetings up and down the country. He suffers a stroke and recovers. However, his Dr has advised him to limit travel in the future and also limit stress levels. This leads to Mr Jones reducing his workdays from 5 to 3 days a week. Mr Jones also stops visiting clients and takes on more of an administrative role in the business.
As he has not been able to go back to his former role in the business, it is likely that condition one would have been met and the policy would payout. (it is important to note that this is simply an example and is not to be taken as a scenario where a payout would be 100% guaranteed. Each case will vary and it is only the insurer themselves that can make this decision)
So, as you can see, the clause is not as clear cut as not being able to work again, it is aimed at not being able to perform your previous role in the same capacity.
2. We suspect that the second clause is there to cover people who can return to work for the same number of hours, however, due to limits in the functions they can perform, their roles have changed.
How does this compare to regular Critical Illness cover?
Although Significant Illness cover still covers quite a few illnesses, it is not as comprehensive as critical illness cover. The list of illnesses for critical illness is long, but the main difference is a critical illness policy doesn’t take into account if you can go back to work or are limited in your job as a qualifying factor. This may sound small, but it makes a big difference.
If we use the same example as above, Mr Jones recovers from his stroke and goes back to work. It would not matter if he went back to full time or if carried on seeing his clients. The policy should pay out anyway.
So, if critical illness provides a more comprehensive cover, why would I choose significant illness cover?
It all depends on the kind of cover you need, however, the biggest reason for clients choosing a relevant life policy with significant illness cover is that the premiums can all be paid by their business as an expense.
For clients who want to take out some form of protection, however, are not necessarily needing a full range of illnesses covered, relevant life with significant illness is ideal.
However, if you are looking for a more comprehensive range of cover, it might be worth taking our relevant life cover without significant illness and sourcing a separate critical illness policy somewhere else.
So how do I know which is right for me?
As you can see, the kind of cover you need isn’t always obvious. That’s why we are happy to take the time to discuss this with you before making a recommendation on the policy and cover that might be right for you and your family. Contact Us