How severe illness cover can protect your financial future

Also referred to as critical illness or dread disease cover, severe illness insurance pays out a capital lump sum on the confirmed diagnosis of a serious illness. Initially limited to cancer, stroke, and heart attack, the benefit has expanded significantly over the years, and today, most insurers offer a wide-ranging list of conditions and varying levels of severity, which makes the product both more comprehensive and, at times, more complex to navigate.

What illnesses are usually covered?

At a minimum, reputable insurers cover cancer, heart attack, stroke, and coronary artery bypass graft, with these four conditions accounting for the bulk of all claims. Other regularly included conditions are kidney failure, aplastic anaemia, muscular dystrophy, motor neuron disease, Alzheimer’s, Parkinson’s, dementia, and infective meningitis, although it’s important to note that no two insurers cover exactly the same set of illnesses, so carefully check your policy wording.

If you are diagnosed with an illness not specifically listed, some policies include a ‘catch-all’ clause that ensures you are covered for any disease that permanently impairs your health and your ability to function. Equally important is checking for exclusions. These could be general (such as illnesses caused by self-inflicted injury, substance abuse, or attempted suicide) or specific exclusions related to your personal health underwriting. Waiting periods and survival periods also apply,in some cases, you may be required to survive a set period (such as 14 days) after diagnosis before the claim is valid. Finally, check whether your cover terminates at a particular age. While older policies often stopped at age 65, many insurers now offer whole-of-life cover, provided you continue paying premiums.

How much cover do you need?

While there is no precise formula for calculating the right level of severe illness cover, it’s important to consider how it fits with your existing financial protection portfolio. For example:

• Do you have medical aid and gap cover, and what level of benefits do they provide?
• Do you hold income protection cover, which secures your earnings during illness?
• Do you already have lump sum disability benefits?

Severe illness cover is designed to complement these protections by funding expenses that medical aid or gap cover may not pay. Think of costs such as home modifications, vehicle adaptations, private nursing care, new drugs not yet approved by medical schemes, or therapies not listed on your medical aid’s formulary.

Standalone vs accelerated benefits

When structuring your policy, understand the difference between standalone and accelerated benefits. With an accelerated benefit, any payout for a severe illness reduces your life cover accordingly, with no reinstatement. On the other hand, a standalone benefit pays independently of your life cover, leaving that sum intact. While some accelerated benefits include a reinstatement feature that restores cover for unrelated future illnesses, this generally varies between insurers.

What determines your premium?

Premiums are risk-based and calculated after considering your age, health, smoking status, pre-existing conditions, family medical history, and lifestyle factors. Generally speaking, insurers offer different premium patterns:

• Level premiums: fixed for the term of the policy.
• Age-rated premiums: increase as you get older.
• Compulsory increases: built-in premium escalations to manage long-term affordability.

As such, be sure you understand which pattern applies, as affordability over the long haul is critical to maintaining cover.

How claims are assessed

In the past, policies were simple: a lump sum was paid on diagnosis. Newer policies, however, often use tiered benefits with percentage-based payouts that reflect the severity of the disease. For example, a Stage 1 cancer diagnosis may trigger a 25% payout, with additional payouts as the disease progresses. Some insurers use internationally recognised assessment tools that measure your physical, mental, and functional ability to determine benefit levels.

How can payouts be used?

The payout from a severe illness policy is tax-free, and you may use it at your discretion. Common uses include lifestyle modifications, medical appliances and prosthetics, rehabilitation and therapies not covered by medical aid, travel and accommodation to access specialist treatment, private nursing or home care.

Balancing cost and need

It’s important to note that severe illness cover is one of the more expensive long-term insurance benefits. While it can provide a financial lifeline during one of life’s most challenging times, the cost must be weighed within the context of your entire financial plan. Too much cover can strain your monthly budget, while too little can leave you exposed at a time of great vulnerability.

Severe illness cover has evolved into a highly specialised benefit, designed to support you through the financial shock of a serious medical diagnosis. Its value lies in the flexibility of the tax-free payout and the peace of mind that comes with knowing your lifestyle and financial commitments can be maintained even in the face of disease. Because of the complexity and variability across insurers, it is wise to seek guidance from an independent financial advisor who can help you understand product nuances, align the benefit with your needs, and balance costs within your overall protection portfolio.

* Odendaal is a Certified Financial Planner at Crue Invest.

PERSONAL FINANCE