R05 Severity-based cover and developments: free practice questions

1. Question 1 of 4

   How does severity-based critical illness cover pay out?

   Option A: A proportion based on severity, with further claims if it progressesOption B: A monthly income from diagnosis until the insured recoversOption C: Only on death following the diagnosis of a covered conditionOption D: The full sum assured for every covered condition, however mild

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   The answer is A: A proportion based on severity, with further claims if it progresses

   Severity-based cover covers more conditions but pays a proportion, for example 10%, 50% or 100%, depending on severity. It allows further claims if a condition progresses.

   Why the other options are wrong

   B

   It pays lump sums, not a monthly income.

   C

   It pays on diagnosis, not only on death.

   D

   Severity-based cover pays a proportion for milder conditions, not the full sum.

2. Question 2 of 4

   What problem with traditional critical illness cover did severity-based cover set out to address?

   Option A: Premiums being too cheap for insurers to sustainOption B: Full payment for some cancers that were minor or completely treatableOption C: Claims being paid as an income instead of as lump sumsOption D: Too few conditions being covered as standard by all insurers in the market

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   The answer is B: Full payment for some cancers that were minor or completely treatable

   Some traditional policies paid the full sum assured for minor or fully treatable cancers. Severity-based cover pays in proportion to severity and allows further claims as an illness progresses.

   Why the other options are wrong

   A

   Severity-based cover wasn't a response to premiums being too cheap.

   C

   Critical illness pays lump sums; severity-based cover changes how much, not whether it's income.

   D

   The trend has been towards more conditions covered, not too few.

3. Question 3 of 4

   Yusuf has £150,000 of severity-based cover. He is diagnosed with an early-stage cancer that pays at the 25% level. Later it progresses to a stage paying 100%. Assuming the policy pays the difference, what is his total payout?

   Option A: £37,500Option B: £187,500Option C: £112,500Option D: £150,000

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   The answer is D: £150,000

   The first claim pays 25% × £150,000 = £37,500. When the illness progresses to the 100% level, a further £112,500 brings the total to £150,000. Exact rules vary by insurer.

   Why the other options are wrong

   A

   £37,500 is only the first 25% payment; progression to 100% brings further benefit.

   B

   £187,500 exceeds the £150,000 sum assured.

   C

   £112,500 is only the second payment; the first £37,500 counts too.

4. Question 4 of 4

   The latest ABI guidance provides model critical illness definitions. What does this mean for insurers?

   Option A: The list is exhaustive, so no other illness may be covered at allOption B: They must all charge identical premiums for exactly the same level of coverOption C: They must cover every illness listed in the guidance as standardOption D: Not every listed illness must be covered; unlisted ones need similar wording

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   The answer is D: Not every listed illness must be covered; unlisted ones need similar wording

   The guidance provides model definitions but does not require every listed illness to be covered, and it is not exhaustive. Any unlisted illness must be defined in similar detail.

   Why the other options are wrong

   A

   The list isn't exhaustive; other illnesses can be covered.

   B

   The guidance doesn't set premiums.

   C

   Insurers don't have to cover every listed illness.

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