Ensuring Fair Treatment: The FCA’s Review of Terminal Illness Benefits in Life Insurance

Life insurance products offer peace of mind for policyholders and their families during future and often unknown challenging times, with terminal illness (TI) benefits typically included within these products i.e. alongside the term or whole of life insurance. The TI cover offers an early payout for policyholders facing a terminal diagnosis, distinguishing itself from critical illness protection: TI benefits provide unrestricted lump sum payments, aiding individuals in managing financial affairs during times of need.

Background of the review

The FCA’s recent review, published in October 2023, scrutinises life insurers’ practices to ensure fair treatment for those making TI claims. The study advocates for a reconsideration of the 12-month prognosis requirement; emphasises timely and transparent claims processes; and encourages insurers to align policy wording with actual claims procedures. The overarching goal is to enhance customer outcomes and uphold the principles of the FCA’s Consumer Duty.

Recognising the vulnerability of individuals making TI claims, the FCA’s multi-firm review delves into the practices of life insurers to assess whether improvements are needed. Aligned with the FCA’s Consumer Duty, the review assessed insurers’ actions for good customer outcomes, aiming to ensure that insurers prioritise customers’ well-being and deliver fair outcomes during such sensitive times. The approach involved a survey, data requests, engagement with industry bodies, and evaluation of policy wording and claims processes’ adequacy.

Key focus areas

1. 12-Month Prognosis Requirement: The study questions the necessity of a 12-month prognosis for terminal illnesses, considering potential variations in time frames and their impact on policy costs. Insurers are encouraged to proactively review policy wording and sales processes, aligning them with customer expectations and the outcomes mandated by the Consumer Duty.

2. Claims Process and Management Information: While overall claims statistics do not suggest widespread issues, it was noted that there were some instances of some policyholders being unreasonably declined, the study emphasises the importance of ensuring fairness throughout the claims process.

3. Timeliness of Claim Handling: Wide variations in insurers’ average claim processing times are noted, with a call for improvements to accommodate the needs of terminally ill customers. Proactive approaches to obtaining medical evidence are highlighted as best practice.

4. Internal Medical Experts: The use of internal medical experts is acknowledged but with a focus on clear communication and consideration of treating practitioners’ opinions. Transparency regarding the independence and professional standing of internal medical experts is emphasised, ensuring clarity for the customer.

5. Policy Wording Alignment with Claims Process: The study identifies potential conflicts between policy wording and actual claims processes, urging insurers to align both for consistency and clarity.

6. Terminal Illness Benefit Removal at Policy End: Some insurers exclude TI claims in the last 12 months of a policy, a practice questioned for potential harm to customers. Insurers are encouraged to review such policy terms and provide evidence of consistency with the Consumer Duty.

Conclusion

In conclusion, the study recognises the value of TI benefits and calls for continuous improvement in insurers’ practices. It emphasises the need for fair, transparent, and prompt handling of claims, particularly for terminally ill customers. As the industry moves forward, insurers are urged to consider alternative approaches to TI benefits and contribute to the ongoing dialogue on enhancing customer outcomes in the realm of life insurance protection.

References: Review of terminal illness benefits within life insurance protection products | FCA