Buyer’s guide to critical illness insurance

Critical illness insurance (CII) provides a fixed lump-sum payment to employees who have been diagnosed with a condition defined by an insurance policy as a critical illness.

The conditions covered by CII policies vary between insurers, but core critical illnesses that are typically covered include cancer, heart attacks and strokes. There is also often access to additional cover for other serious conditions.

CII policies are relatively easy to implement, and as long as the amount of cover is below 拢250,000, they do not need to be medically underwritten, although pre-existing conditions are usually excluded.

Cover is paid out directly to an employee after they have endured an illness for a specified number of days. The lump-sum payment, usually a multiple of salary, is tax-free for the employee and the premiums are classed as a P11D benefit for employers.

Employers receive corporation tax relief on the premiums they pay, but are liable for Class 1A national insurance contributions.

Growing trend

A growing trend is for employers to provide CII as part of a flexible benefits package or on a voluntary basis. Under such arrangements, the premium paid by the employee will not qualify for tax relief.

Take-up of CII can be higher when it is part of a flex scheme, because of choice in the scheme鈥檚 structure and the way in which benefits are promoted to staff. Group critical illness has the lowest in-force volume of UK flexible benefits business at 拢37 million, compared with 拢97 million for group life cover and 拢58 million for group income protection, according to Swiss Re鈥檚 Group Watch 2013 report, published in April 2013, but it represents the highest percentage of flex-related business at 61.4%.

Pensions auto-enrolment has also prompted many employers to take a fresh look at their employee benefits offering. This may lead to a rise in CII take-up, because group CII offers an affordable and valued alternative to pay rises, which many employers are still unable to offer their workforce. This trend is expected to continue.

The Swiss Re Group Watch 2013 also showed strong growth of 8.7% for long-term disability and critical illness premiums for the year.

According to the report, there are now 2,500 critical illness insurance schemes in place in the UK, covering some 340,000 employees.

With serious illnesses such as cancer affecting more than one in three people during their lifetime, according to Cancer Research UK, and about 2.3 million people living with coronary heart disease in the UK, according to the British Heart Foundation, it is little wonder that CII is highly valued by employees. About two-thirds of group CII claims are for cancer, according to protection specialists.

Small print

Employers must be diligent in the way they communicate CII to employees. It is imperative that the small print of any policy is read and understood, particularly in terms of which conditions are covered.

For example, some insurers will state that symptoms must be permanent and irreversible to trigger a payout, while other providers might stipulate that an employee鈥檚 condition must be at an advanced stage.

Also, not all types of cancer may be included. Failure to understand any exclusions, including those linked to a pre-existing condition, could lead to an employee feeling let down by their employer when they are at their most vulnerable.聽

The facts

What is group critical illness insurance?

It provides a tax-free lump-sum payment to an employee diagnosed with a serious, usually life-threatening, illness, as defined by the policy.

A payout is triggered when the employee survives the initial event for a specified period (14, 28 or 30 days), and is designed to help them make necessary adjustments to their lifestyle, such as repaying a mortgage, or to fund leading-edge medical treatment.

Payment is made regardless of an employee鈥檚 recovery period and irrespective of whether they can continue to work.

Where can employers get more information?

The Association of British Insurers provides a statement of best practice

Who are the main providers?

Aviva, Bupa, Canada Life, Ellipse, Friends Life, Friends Provident, Legal and General, Metlife, Swiss Re and Unum.

Statistics

2,500: The number of group CII schemes in place covering 340,000 employees, according to聽Swiss Re鈥檚 Group Watch 2013 report.

8.7%: The growth of group risk premiums in 2012 compared with 2011, according to聽Swiss Re鈥檚 Group Watch 2013 report.