Critical Illness Cover

Once the proposal form is filled in, the proposer has to wait until the company has assessed it, obtained (in some cases) a medical report from the proposer’s doctor, and decided whether or not to accept the risk. If it does, it will generally send a letter saying so and asking for the first premium; it is only after this first premium has been paid, or more exactly after it has been received by the company or its agent, that the cover commences. (A few offices now allow the first premium to accompany the proposal form on simple types of critical illness insurance policies, in which case cover commences as soon as the company accepts the proposal.)

Only after it has received the first premium does the company prepare and send out the policy document, setting out the terms of the contract. The policy document should be kept with care as it will be required (a) for a claim and/or (b) if the policyholder wants to borrow against the policy. If it is lost, the company may for a fee issue a duplicate, but before doing so will require the policyholder to sign a form of indemnity. In the large majority of cases where people think they have lost their policy document, a thorough search will normally uncover it, perhaps in the hands of a bank manager, solicitor or accountant.

The policyholder can often choose whether to pay premiums annually, or at six-monthly, quarterly or monthly intervals. Premiums are normally calculated on the basis that they are paid annually in advance, so that the payment at shorter intervals means the company receives less interest and incurs more expenses than on the annual basis. Monthly premiums therefore carry a loading of 2-5% over annual premiums.

Monthly premiums may be on a “true” or an “installment” basis. In the latter case, if the assured claims between two policy anniversaries the balance of a year’s premiums will be deducted from the policy proceeds. No such deduction is made if the policy is subject to “true” monthly premiums.

One important point to note is that by its nature property is a relatively illiquid investment. It is not easy to turn bricks and mortar into cash because the sale of a property is a protracted business in terms both of getting a buyer and of completing the legal transaction. For this reason, most property funds contain a clause whereby they may delay the cashing-in of units by investors for up to six months if necessary. To avoid the necessity of invoking this clause, most also have “stand-by” credit facilities with their parent company or a bank whereby the latter guarantees to provide specified sums of cash if this is necessary. Such guarantees are, of course, only as good as the companies offering them and those offered by smaller companies and funds may be deficient in this respect.

Property funds are normally valued at monthly intervals. Such valuations are to some extent arbitrary, because the only real test of a property’s value is the price that someone actually pays for it. Hypothetical valuations based on the return that institutional investors are currently seeking on new property investments are no more than estimates and cannot provide anything like the same degree of certainty about value as a Stock Exchange price quotation does. Valuers do, of course, do their best to make as accurate judgements as they can, but movements in valuations over any short period should not be taken too seriously.

Equity funds are very similar to unit trusts, restricting themselves to investment in shares. Fixed-interest funds invest in a wide range of fixed-interest securities from local authority to commercial loan and gilt-edged stocks. The gilt-edged critical illness insurance fund restricts itself to the latter category. The cash or money fund invests only in short-term deposits with banks and local authorities, and can obtain far better interest rates on the money in large sums than the individual can hope to get on his small deposits. The managed fund normally places its investments between all these types of investment, holding units in all these other funds.

If the parents do have capital (or the grandparents are providing it) a trust may be set up into which money is paid. This educational trust then purchases a series of deferred annuities payable not to the parents or the child but to a school (which does not have to be named until shortly before schooling begins). This method may especially be suitable for those paying high rates of income tax, for which the net returns can be of very important value.

These trusts are quite different from the trusts con­stituted under the Married Women’s Property Act (MWPA) which are normally used to ensure that the proceeds of a critical illness insurance policy designed to benefit children actually reach them free of tax. In this case the policy is written under trust and the contract contains the stipulation that the critical illness insurance policy proceeds are to be payable to either the wife alone, to the wife and children, to the children alone, or to an individually named child or children.

Normally the husband and wife are named as the trustees, thus maintaining some control over the disposition of the proceeds. However, once the trust has been constituted, it may not be altered without the consent of those named as beneficiaries, and a child may not give its consent until reaching the age of majority (18). Thus, the use of the MWPA provisions for educational plans does mean an irrevocable commitment of the proceeds to the child(ren) and this may not be desired by some parents. The main advantage of the procedure is that, if the policyholder (usually the father) dies, the proceeds of the policy will be immediately avail­able to the wife and children and no cash will be payable.

The MWP is a type of policy which is also useful for providing a sum for a child, say, at the age of majority or on marriage. Provided the wording of the trust allows this, the trustees can have the power to make the policy pay benefits.