Last autumn the Financial Conduct Authority (FCA) raised serious concerns about how insurers are addressing terminal illness benefits attached to life insurance policies.
Almost six months on from the regulator’s review, Health & Protection has found insurers have undergone a period of introspection as they take another look at the design of their terminal illness benefit policies.
And it seems action in this area cannot come soon enough for advisers who are having to contend with delays in decision making leading to ambiguity over whether their customers’ claim will prove successful at the most vulnerable time in their lives.
Compounding the issue is the added problem of widespread confusion over what terminal illness benefit actually is.
In December 2022, Alan Knowles, co-managing director at Cura Financial Services, took to the Protection Review stage to declare terminal illness was in need of an overhaul.
He argued that changing its name would reduce confusion and help define it better in the sales process and that exclusions for claims within the last 12 or 18 months of historic life policies should be removed.
And in the year that followed the FCA strongly criticised insurers for the speed of terminal illness claims where times were typically between two and three months, warning that customers’ remaining time should not be “marred by having to wait or chase for a claims decision”.
The FCA also raised concerns about insurers using a 12-month prognosis period for terminal illness claims without evidence to show it was fit for purpose.
And the FCA told insurers to review whether excluding terminal illness claims at the end of policies was compatible with good outcomes under the Consumer Duty.
Ongoing reviews
So how have insurers responded to the regulator’s call to action almost six months on?
Jennifer Gilchrist, protection expert at Royal London, told Health & Protection that the insurer has been undertaking an ongoing review – not just on terminal illness but around claims end to end to ensure the process can be the best that it can be.
On the issue of exclusions for claims within the last 12 or 18 months of historic life policies, Gilchrist said the insurer does have a back book of legacy contracts containing these policies.
“What the FCA are saying is, what are you seeing? What outcomes are you seeing there?” Gilchrist says.
“So we need to go and have a look at what is the claims experience through these different products and are we actually seeing problems with that exclusion?”
Scott Cadger, head of protection platforms at Lloyds Banking Group, reveals the insurer conducts regular product reviews.
“We have a cycle called our continuous product management process where we will look at risks monthly that are coming out in the market that we see,” Cadger explains.
According to Cadger, the process involves a “full deep dive” looking at all product features to see if they are fit for purpose.
“This is not just on new business products,” Cadger says. “This is right across our whole business. This runs right across Lloyds Banking Group in the protection space. We don’t just look at what we’re currently offering into market – we look at everything that we’ve got there.”
And when the regulator wrote to insurers about their concerns, Cadger says the firm ensured it had a look at the issues raised.
“To be fair, the team had already been looking at this space,” Cadger continues.
“So for everything that we offer today new business-wise we feel very comfortable with our how terminal illness product works in line with the FCA piece around for our IFA product if you claim for terminal illness, it can run up to 11 months and 30 days beyond the end of term.
“So you can put in a terminal illness date on the last day of the policy and it would still be subject to being a valid claim. It would still be assessed even if your prognosis was going beyond the end of term which I think was one of the big, key points from the FCA around business drop off.
“And actually, in those last 12 months the nervousness is that you’ve got this benefit that is reducing month by month as you get closer to 12 months. We had already made those changes.”
Touching on whether a 12-month prognosis period for accepting terminal illness claims was appropriate, Cadger says: “We still have the 12-month period and I think both us individually and collectively as a market – because we’ve discussed this extensively across ABI [Association of British Insurers] groups – it’s a real challenge. Because the ability for a specialist to give a prognosis of if it is more or less than 12 months is a difficult thing.”
But Cadger also maintains that delays in claims processing were not entirely in the hands of insurers.
“They’re not sitting on cases looking at these ones waiting for five, 10, 15 days before it comes into assessment processes,” Cadger continues. “It is about once the evidence is there, getting onto it really quickly.
“And these claims from our side anyway go straight to our experienced medical claims assessors because these are not dealt with by call handlers… These are experienced claims assessors that look at these cases end to end.”
Disagreement among CMOs
But what happens when experts disagree?
Alan Lakey, director at Highclere Financial Services, told Health & Protection a further issue with terminal illness definitions is many of them say that not only must the claimants specialist say death is likely within 12 months but the insurer’s chief medical officer must also agree. “Frequently I hear of CMOs disagreeing,” Lakey maintains.
And delays in finding out whether a customer can claim at such a troubling time in their lives remain a concern for advisers.
For Joanna Streames, owner of Velvet Mortgage and Insure Services, the matter needs to be addressed – and in the brave new world of Consumer Duty is a “must”.
“Imagine the worries you have after having been given this prognosis to then have to faff and chase for this outcome. It’s a pretty simple diagnosis at this point and I think it is unfair to put a timeline on it,” Streames says.
“I’d be interested to see the statistics for terminally ill people that have a long life expectancy past a couple of years but there aren’t many I am sure – so surely these could be what would be a loss leader as in other industries in the name of human empathy and good will.”
Roy Mcloughlin, director at Cavendish Ware, told Health & Protection it is “drastically unfair” that in the last 12 months of a policy there is ambiguity about whether a customer can claim.
“You’re choosing when you’re going to die for want of a better expression,” Mcloughlin says.
“I think that ambiguity should be cleared up and clarified and people should have terminal illness until the very end of the policy.
“We’ve got to get this balance right because this is included in I think nearly all policies, and yet there seems to be immense cynicism as to whether it will pay out.
“Guardian have a more friendly definition where diagnosis of Stage 4 cancer, motor neurone disease, Parkinson Plus syndrome and CJD (Creutzfeldt-Jakob Disease) automatically trigger a TI claim.”
Guardian’s proposition also came in for praise from Naomi Greatorex, managing director of Heath Protection, who maintains their innovation is something other insurers can learn from.
“I think they have from more support, certainly for cancer. Cancer is such a high claim under critical illness,” Greatorex says. “With one in two people will diagnosed with cancer, it becomes a very important conversation to have.”
Two life insurance options
Hilary Banks, Guardian’s sales director, explains the insurer’s move to offer two life insurance options: Life Protection which has an enhanced terminal illness definition, and Life Essentials, launched in January 2024, which has the industry-standard 12-months to live definition, was designed to provide consumers with a choice.
“In terms of outcomes, we do believe that the enhanced terminal illness definition available on our premier life protection cover can deliver better outcomes for terminally ill customers,” Banks says.
“With the enhanced definition, we don’t need to wait for the doctor’s prognosis of length of life for customers diagnosed with incurable Stage 4 cancer, motor neurone disease, Parkinson Plus syndromes or Creutzfeldt-Jakob disease (with incurable Stage 4 cancer being the most commonly claimed-for condition under this benefit), in order to make the pay out.”
And it appears insurers are alive to the issue of ensuring members can successfully claim in a timely manner.
Justin Taurog, managing director, VitalityLife, told Health & Protection, says: “Whether it’s a terminal illness or any other type of claim, we are committed to ensuring our members get what they need quickly. We understand how important it is to receive a pay out in a timely way once a claim is made, a sentiment reinforced by the FCA last year, and we’re pleased to say that we paid out 99.7% of all life and terminal claims made last year.”
Victoria Francis, head of individual protection propositions at Aviva, adds: “Terminal illness remains a valuable benefit on life insurance products. Over the past five years we have paid £448m in claims for the terminal illness benefit– providing financial assistance for around 3,500 customers and their families. We recognise many of the challenges raised in the FCA review and welcome the renewed focus it will hopefully drive within the industry.”
Customer confusion
But it is clear terminal illness benefit also suffers from the fact customers often do not know what it is or even what it does.
“It gets confused with critical illness all the time and I think that needs to be clarified,” Mcloughlin says.
“That’s something that not the FCA’s problem. That’s everyone’s problem.”
But even whether a change of name is necessary is a bone of contention across the industry.
For Emma Thomson, head of protection development at Sesame Bankhall Group, changing the benefit’s name might help improve clarity and also reduce the chances of consumers getting muddled up with critical illness cover.
“Naming it something along the lines of ‘Advance Payment’ with an explanation of when it would be paid might help for example, but insurers would still need to address the issue of how the medical profession support terminally ill patients to ensure payments can be made efficiently and help claimants sort out their affairs before they pass away,” Thomson says.
But Banks says she is not convinced that the benefit’s name needs to change as it is paid out if a policyholder has a terminal illness.
“But we certainly should be mindful to use the full name and not acronyms as these can lead to confusion,” Banks adds.
Role of advisers
Ultimately, this is where the role of the adviser becomes ever more important – to demystify confusion around this most important benefit as customers increase spend on protection insurance.
David Hollingworth, associate director, communications at London & Country Mortgages, says: “Terminal illness is a term that could risk customers confusing with critical illness and so an adviser will be vital to ensuring better understanding.”
Andy Walton, proposition director – protection at Mortgage Advice Bureau, adds: “We’re seeing customers spending more on protection, with premiums up 8% year-on-year.
“We’re also seeing more customers with less savings due to the cost-of-living crisis. This has been a driver for some to consider protection, given that their back-up savings have gone down.”