This dread donkey must be dropped

What was the fastest- growing product of 1996? The gruesome answer is critical illness cover, or "dread disease" insurance, as it was once known. Last year some 470,000 people insured themselves against getting a critical illness such as cancer, heart attack or stroke, or even some 30 other dread diseases, and surviving for 28 days.

Critical illness cover (CIC) met with a mixed reception when introduced in the UK in 1986. One marketing director who rejected the product confesses to feeling like the manager who turned down the Beatles. But there is a sting in the tail. It may well be rational to consider this protection. Yet, when salesmen reel off long lists of up to 34 nasty diseases, fear may become the dominant factor. Concern may then be allayed by the prospect of lump sum pay-outs reaching pounds 500,000 or more if you pay enough premiums. The combination of fear and greed is pretty potent.

How easy is it to choose which products offer the best value for money? Of some 75 products in a recent survey, 25 covered between 10 to 19 illnesses, another 25 covered 20 to 29, and a further 25 covered 30 to 34. Yet about 95 per cent of claims arise on only five - cancer, heart attacks, strokes, multiple sclerosis and coronary artery bypass surgery. Are the extra illnesses covered marketing gimmicks?

Even when policies cover the same number of illnesses there is no simple choice. The make-up of illnesses differs. For example, Sun Life and Commercial Union have policies covering 23 illnesses. Of these 19 are common to both policies. Sun Life then covers Alzheimer's, Aids through blood transfusions, loss of independent existence, and Total Permanent Disability (defined as unable to carry out certain activities of daily living). How does one choose - by tossing a coin?

Does CIC meet real needs? A lump sum may meet debts such as mortgages, but it is not the best way of replacing income, or providing for care.

The greatest concern, however, arises over the "widows(ers) and children" problem brought out in the OFT report last year. More than 80 per cent of CIC sales are on an "accelerated either/or basis". After a critical illness payout, no payout can be made to dependents on the death of the policyholder. Dependents will not then get the benefits once envisaged for them. Many policyholders may be under the illusion that they have both types of cover.

This problem has been recognised in other countries where critical illness cover has been promoted. In the US, the insurance authorities have drawn up an Accelerated Benefits Model Act which requires the consent of the beneficiaries to any acceleration of benefits.

What are the UK companies doing about this problem? No company has introduced a buy-back policy. Peter Mannion of Munich Re says progress has been disappointing. Some companies say buy-back policies would be too costly.

It is also possible they might consider that re-casting policies could be viewed as an acknowledgement of faults in policies already sold. But can they continue to sell acceleration policies without the protection other countries recognise as necessary? There really is trouble ahead.