Understanding the value of partial payment benefits
CommInsure's Jeffrey Scott explains the value of partial payment benefits, which have evolved significantly since their first introduction 20 years ago.
If you were diagnosed with a life-threatening illness or injury, how would you react? Shock? Yes. Denial? Yes.
Most people would then want to discover if there was any way to overcome the illness.
If there was no chance of recovery, then individuals tend to start getting their affairs in order (pay off debts, update the will etc.), or enjoying their final days (or both).
If a client is diagnosed with a serious condition that could get progressively worse, then the most difficult thing to cope with may not initially be the illness or injury – but rather the waiting: waiting to determine if and when their injury or illness qualifies them for an insurance payment.
And in some cases, clients may be diagnosed with an illness or injury, and not be eligible for payment.
This is where partial payments can be of interest.
What are partial life insurance payments?
Partial life insurance payments are claim payments that are made where the full sum insured is not paid out.
These were first introduced in Australia more than 20 years ago with the terminal illness benefit on life insurance (death cover).
At the time, if a person was diagnosed with a life-threatening illness and two medical specialists believed the life insured had less than 12 months to live, then 50 per cent of the sum insured was paid and 50 per cent of the death benefit remained.
If the client had a miraculous recovery then they still had some death cover remaining. Since that time, the terminal illness benefit has been increased to a full benefit payment.
Partial payments have now expanded across trauma policies, total and permanent disability (TPD) policies, and income protection policies.
Trauma policies provide partial payments in the event of early-stage cancers, partial loss of hearing, multiple sclerosis, severe osteoporosis, diabetes complications, serious injury, critical care, or being placed on a waiting list for major organ transplant.
Both trauma and TPD policies provide partial payments in the event of partial loss of sight, loss of one hand, or loss of one foot. Income protection policies provide a partial benefit in the event the life insured is sick or injured and is not able to return to full-time employment.
Some companies have taken partial benefit payments in a different direction.
They provide partial payments upon diagnosis for numerous diseases and illnesses.
This results in the client obtaining a trauma payment in most circumstances.
The level of severity of the illness or injury will determine the proportion of the sum insured that is paid.
The trade-off for this benefit design is that it is normally more difficult for the life insured to qualify for the full sum insured amount, as the level of severity for the full payment is more onerous.
Meeting a real need
In terms of demand, in Australia alone there are around 21,000 people with multiple sclerosis, 150,000 people with Type 1 diabetes, 600,000 with osteoporosis, 1,600 people on transplant waiting lists, 100,000 new cases of cancer diagnosed each year, 35,000 amputees, 300,000 are blind or vision impaired (that cannot be corrected with glasses) with 700 new cases per year.
Partial trauma or TPD payments allow people who are diagnosed with the illnesses or injuries listed above to make a transition.
Normally individuals will need time to grow accustomed to the loss of mobility or function associated with their new condition.
The money from a partial life insurance policy that has been paid allows individuals to purchase aides, obtain alternative therapies, learn how to use support networks, or take time out (away from work) to adjust to their new situation.
Why would insurance companies want to give away a partial payment? Why wouldn’t they just wait until the client qualifies for a “full” benefit?
One of the key drivers is achieving the best outcome for both the client and the insurance company.
If a client has an early diagnosis of a potentially life-threatening illness or injury, their chance of recovery is far greater.
An insurance company can pay a small claim now (partial payment) that allows the life insured to obtain the appropriate medical care and take the time off work to recuperate without a significant financial impact to them or their family.
Further, early diagnosis and treatment of a medical condition typically result in an improved long-term prognosis, thereby assisting the client in their rehabilitation.
Partial payments can benefit both clients and insurance companies.
The financial windfall allows clients to manage their condition more effectively at an earlier stage, while allowing insurance companies to proactively manage their claims risk.
Jeffrey Scott is the executive manager of InsuranceTech at CommInsure.
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