Critical Illness Insurance

Critical illness insurance pays out a lump-sum amount if you were to suffer any one of the critical illness conditions stated in the policy, so long as that occurs during the term of the policy.

Although some plans cover as few as 35 specific conditions it is possible to gain cover for over 100 conditions with some insurers. For an average critical illness policy covering around 40 conditions, approximately 80% of claims are for cancer, heart attack or stroke.

As critical illness cover pays out a lump-sum amount it is often used to protect a loan, such as a mortgage. The plan can be set-up so the level of cover remains fixed over time to protect an interest only mortgage or set-up so the amount of cover declines over time to protect a principal repayment mortgage.

Another benefit of critical illness insurance paying out a lump-sum is that it can be used to make home modifications, such as installing a stair lift. It can also provide a level of capital to fund monthly outgoings for a period of time whilst recovering.

Cancer Research UK (2012) state that around 325,000 people are diagnosed with cancer every year and that 1 in 3 of us will develop cancer at some point in our lives. Given this it is not surprising that approximately 60% of all critical illness claims are for cancer.

In addition, the British Heart Foundation (2012) states that around 152,000 people suffer a stroke each year and 103,000 suffer a heart attack.

With advances in medicine a greater proportion of people are surviving these critical illnesses than ever before. For example, the British Heart Foundation (2012) estimates that there about 1.2 million people living in the UK that have had a stroke. It is therefore very important to consider how you would survive financially whilst recovering or if you were never able to return to work.

When looking for the best critical illness insurance there are a number of important factors to consider, which include the number of conditions covered and the payout rate for that policy.

Firstly, it makes sense to find out how many critical illness conditions are covered by the policy, which can range from as few as 35 to over 100. It is also worth seeing how many ‘ABI definitions’ the policy uses. The Association of British Insurers (ABI) has written model critical illness definitions as a best practice, which is optional for insurers to follow.

Secondly, one guide to the quality of the policy and integrity of the insurer may be based on the payout rate for that plan. Some insurers do not publish their payout rates whereas others frequently publish payout rates well above 90% of all claims made.

Our online comparison quote engine not only displays the premium charged by each insurer but also lists the number of conditions covered and the payout rate for that insurer, if available.

Should I combine with life insurance?

Critical illness cover is most commonly taken out as an add-on with life insurance. The combined life insurance with critical illness cover policy would usually payout on the first event of either death or you suffering a critical illness condition.

This type of cover is normally taken out together because the price of a standalone critical illness policy is usually exactly the same as a life policy with critical illness cover. This is due to certain insurer tax advantages available for life insurance and the fact that there is such a high chance of suffering a critical illness before death.

If you are looking to protect yourself again the financial risk of injury or illness then it is definitely worth considering long-term income protection insurance as an alternative to a critical illness plan.

The main issue with critical illness insurance is that it only covers a specified number of conditions, and they do not relate to your continued ability to earn an income, which is what pays for all the bills at the end of the day.

Sure, if you were to develop cancer there is a good chance you might not be able to work for a lengthy period of time, but what about if you slipped a disk in your back or had to cease working due to depression? In this case an income protection plan would payout whereas a critical illness policy would not.

With ‘own occupation’ income protection the plan would payout for any medical condition that prevents you from working in your current job, which means that you can continue to meet your monthly financial obligations whilst incapacitated.

At Drewberry we are able to offer both plans but tend to recommend income protection for the reasons set-out above. To find out more please read our guide on critical illness cover vs income protection.

When looking at critical illness cover you may also come across a policy called ‘Serious Illness Cover’ from Vitality. This policy is very similar in the sense that it pays out a lump-sum and runs for a specific term length but there is a very significant difference.

With critical illness cover if you suffer any one of the medical conditions listed in the terms and conditions then the plan will payout 100% of the sum assured (i.e. the level of cover you selected). However, with serious illness cover the amount paid out is based on the severity of the illness and can range from paying out 25% to 100% of your sum assured.

This may sound like a worse proposition but the serious illness policy covers 100 conditions relative to around 40 conditions with other insurers so you are more likely to get a payout with the Vitality policy.

Furthermore, even if both plans cover the same illness the Vitality plan is likely to payout a reduced amount for low severity cases where a critical illness policy would generally only payout for a high severity case. There are very few examples of where a critical illness policy would payout 100% and the serious illness plan would payout less than 100% of your level of cover.

Given the number of different policy choices you have available to you in order to cover the risk of illness and injury it makes sense to speak to a professional adviser to run through them.

The adviser can talk you through the differences between critical illness cover, serious illness cover and income protection insurance. After discussing your needs it should become clear which policy choice would be best for you.

If you would like to compare quotes for the different products the adviser can put together various options for you to consider. Feel free to pop us a call on 0208 432 7333 to get started.