Question Why is it that the terminal illness benefit only gives rise to additional claims for events close to the end of the policy term? Solution A terminal illness is usually defined as an illness that in the opinion of a hospital consultant will result in the death of the policyholder within a 12 month period. A benefit payable on diagnosis of a terminal illness more than 12 months before the end of the policy term is just a death benefit paid 12 months earlier than it would have been under a policy that had no terminal illness benefit. So the extra claims cost is approximately equal to 12 months’ investment return on the sum insured. A benefit payable on diagnosis of a terminal illness within 12 months of the end of the policy term is an additional benefit, because the corresponding ‘death benefit’ is expected to occur after the end of the policy term. The expected cost of this additional benefit could be substantial. PLEASE HELP ME UNDERSTAND THE SOLUTION, AS I DO NOT SEE ANY DIFFERENCE BETWEEN FIRST AND SECOND PART OF THE SOLUTION.
In case 1) the insured would have died within the term of the policy; so is a payment the insurer would have paid anyway. In case 2) an insured diagnosed with a terminal disease within the contract term but who died after the policy term ended would not receive a payout if they had purchased a life insurance policy without a terminal illness add on.
