The price of insuring yourself against serious illness is to rise by around 50% over the next few months, while cover for conditions such as diabetes will be withdrawn as insurers battle against the rising cost of claims on critical illness policies.
These policies guarantee to pay a lump sum - usually equivalent to the size of your mortgage - if you suffer a specified critical illness, such as cancer or a heart attack. They are mostly sold to house buyers when they take out a mortgage, and typically add around £40 per month in payments on a £100,000 loan. Around 8m people are currently covered by 4m policies.
But four of the six largest insurers in the critical illness market this week told broker LifeSearch that they will hike premiums by around 50% in the new year to pay for rising claims, largely brought on by improved medical screening procedures that diagnose critical illnesses earlier than before.
Kevin Carr of LifeSearch says: "This is the biggest change in the critical illness market since they first became popular in the 80s. Four out of the biggest six - we are not allowed to name them - have told us they will be increasing rates by 50% by the new year. It won't be in the form of one big jump but a number of steps.
"Legal & General, for example, put their rates up by between 5% and 10% on Monday this week."
The likelihood is that "guaranteed" policies (where premiums stay the same every year for the term of the contract) will be junked in favour of "reviewable" policies where the insurer will increase premiums every few years. But anyone who has bought already need not fear, as their price guarantees will be honoured.
The market is dominated by L&G, Norwich Union, Scottish Provident, Scottish Equitable, Friends Provident and Swiss Life.
But Swiss Life, regarded as the most innovative in the market, is also telling brokers that the number of conditions that it covers will have to shrink.
"Insurers are having lots of problems with diabetes. Swiss Life covers 38 conditions in its critical illness policy but has basically said they will be removing diabetes. There has been a massive increase in diagnosis as a result of screening, especially age-onset diabetes," says Mr Carr.
There has also been a reduction in cover for prostate cancer, while asthma, Aids and drug abuse are generally excluded from policies.
The price hikes and reduction in cover will inevitably deter many buyers from what is an already expensive form of insurance. Its popularity has soared because big banks and building societies are pushing it as an alternative way to earn commission after the loss of endowment business.
As the LifeSearch table shows, the high street banks tend to overcharge on critical illness policies by 40%-50% - which over the lifetime of the policy can mean the typical mortgage payer is out of pocket by an astonishing £4,500.
That money is pure profit for the mortgage lenders, and you could end up with a policy with inferior coverage and conditions. If your lender presses you to take a critical illness policy, refuse to take their offer and approach a broker instead.
The practice of pushing critical illness as an "add-on" to mortgages is causing widespread concern about mis-selling. Andy Couchman, editor of industry newsletter Healthcare Insurance Report, says: "People should really decide if the critical illness policy is necessary.
"Broadly speaking, they should have an income protection policy as their first priority. It's more important than critical illness cover and in many cases the premiums are lower."
The differences between income protection and critical illness policies are explained in the article below right.
Another concern is whether critical illness policies will pay out as promised. A high number of claims concerning permanent and total disability are rejected, says Mr Couchman, although he says that the vast majority of claims concern cancer and heart attacks, where the industry has a good payment record.
· Cancer survivor feels HSBC 'penalised me for staying alive'
When Regan Clark discovered she was seriously ill with cancer, her finances were about the last thing on her mind. But it was at least some consolation to her that her mortgage endowment policies included critical illness cover.
Her policies paid out promptly - but it was then that her problems began. At a time when she was about to go into hospital for life-saving surgery, she became embroiled in a four-year battle with her mortgage lender HSBC over the pay-out.
This ended last month with her being awarded £3,750 compensation by the financial ombudsman after it ruled she was given misleading advice by the bank.
Ms Clark, 40, says she feels HSBC "penalised me for staying alive". Her case raises questions about the way people diagnosed with a serious illness are treated by financial institutions.
It was in late 1998 that the air hostess was diagnosed with a reproductive cancer. She had a £120,000 mortgage on her house in Camberley, Surrey, and three of her endowments included cover for critical illness.
These paid out a total of £31,000 and Ms Clark told the bank she wanted to use this pay-out to reduce the mortgage by that amount so she would have lower monthly payments during the year she was going to be off work due to her illness.
HSBC said that if she used the money to do this, she must pay a £5,000 early redemption penalty. Appalled at the size of the penalty, Ms Clark decided not to pay it - she used the £31,000 to finance herself during her illness, bought a car and went on holiday.
The ombudsman has now ruled that HSBC "misled" Ms Clark over the redemption penalty: it should have quoted £1,238. The ombudsman says she believes Ms Clark would have paid this smaller penalty and used the £31,000 to reduce her mortgage, cutting her monthly payments dramatically.
As a result of being mis-advised she is now stuck on higher mortgage payments and also has a £31,000 insurance shortfall; yet if she tried to take out life cover to plug this, she would see her premiums heavily loaded.
Ms Clark says all she ever wanted to do was use the endowment pay-outs she received for the purpose they were intended: to pay off the mortgage. She says that, financially, she would have been "better-off" if she had died because then the bank wouldn't have imposed a penalty. She is pleased about the ruling but believes the compensation should be higher.
HSBC says it is "very sorry" it did not show more sensitivity. "Given Miss Clark's circumstances we should have waived the early repayment penalty when she asked to pay off part of her fixed-rate mortgage with proceeds of her critical illness policies. We now take a far more flexible approach in such sensitive circumstances."
The bank adds it offered Ms Clark "significant" compensation (£3,205) earlier this year.
· What has been your experience with critical illness insurance policies? Were you pressed hard to take one out when arranging a mortgage? Were you overcharged? Did the policy pay out as promised when you made a claim? Please email us at jobs.and.money@theguardian.com
