What is an open ended critical illness policy ?
While the flexibility provided by critical illness insurance policies may be very useful, it does of course have a cost. One element of the cost comes when it is combined with life insurance. For the young man such a combined critical illness insurance plan is related to the premiums he can elect to pay up to the age of 65, and this produces a larger guaranteed benefit than that on a shorter-term dated policy term. For example, the 29-year-old paying £10 a month received £3,120 critical illness cover, whereas on a shorter dated plan the same £10 premium would provide a sum assured of about £1, 800. This extra coverage amount from critical illness insurance must reduce the amount of investment benefit derived from a given premium.
A less easily quantified factor is the restriction the flexibility of maturity dates imposes on an insurance company’s investment management. With dated critical illness insurance policies and illness tables, the company can predict with considerable accuracy the volume of claims likely in any year, and this means that it can plan its investments to produce a given amount of income to meet them. If the amount of claims is uncertain, there will be a tendency to “play safe” and allow for a margin of extra income. To achieve this will require a larger proportion of funds being invested in fixed interest securities, which on past evidence at least are unlikely to produce as large an investment gain over long periods as the main alternatives, shares and property.
Since, at the time of writing, open-ended critical illness policies have been in existence for less than 10 years, it is too early to say whether there is any evidence that this second factor is having such an effect. The extra cost of the flexible contract can, however, be estimated in terms of the projected benefits quoted on fixed and open-ended policies over the same period; the flexible policy’s proceeds current bonus rates are projected at between 5% and 15% below those of the fixed endowment over 10 years.
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