Critical Illness Cover – an introduction

Many people today are not only insuring themselves against death but also against critical illness.

What is Critical Illness Cover?

As the name suggests, critical illness cover pays out a tax-free lump sum in the event of diagnosis of a critical illness. In order to claim, the life assured needs to be diagnosed with a critical illness listed amongst those covered by the life insurance company.

Which Illnesses are Covered?

Most providers today provide cover for a comprehensive range of critical illnesses. The Association of British Insurers has published standard definitions for critical illness policies to which most life insurance companies adhere.

There is a “core” range of conditions covered which are:

Cancer
Coronary Artery By-Pass Surgery
Heart Attack
Kidney Failure
Major Organ Transplant
Multiple Sclerosis
Stroke

In addition to this group of ”core” conditions there also exists a range of “additional” conditions.

Aorta graft surgery
Benign brain tumour
Blindness
Coma
Deafness
Heart valve replacement or repair
Loss of limbs
Loss of speech
Motor neurone disease
Paralysis/paraplegia
Parkinson’s disease
Terminal illness
Third degree burns

Not all life insurance companies will provide cover for all illnesses; they may indeed provide cover for illnesses which are not listed.

The important thing to bear in mind is that a claim is payable based on diagnosis and acceptance by the life insurance company. Should you subsequently be cured of the condition you have claimed for then there is no need to repay the sum assured which has been paid out.

Why should I take out Critical Illness Cover?

With advances in medical science it is now more likely than ever that you may be successfully treated for a number of critical illnesses which only a few decades ago would have been fatal. The question you need to ask yourself is, how would you cope financially if you were to “die just a little”. Here are some of the uses to which a payment from a critical illness policy could be put:-

Repayment of loans and mortgages
Replace lost income (especially if self-employed)
Treatment and convalescence
Cover salary of spouse/partner who takes leave from work to care for you
Pay for amendments to home e.g. downstairs bathroom, wheelchair access

The list is endless and needs to be considered in respect of your own personal and family situation.

What types of Policy are Available?

Critical Illness cover can be taken out on a term or whole of life basis, providing cover for single or joint lives assured. It can be taken out alongside life insurance, or as a stand-alone policy in its own rights.

Another option available is a “family income policy” by which the policy pays an annual income in the event of a claim – e.g. A 20 year plan for £30,000 per annum – successful claim in year 7 – the plan pays £30,000 per year to the claimant until the end of the 20th year.

Claims Experience

As more and more people take out critical illness cover, the level of claims has risen. For example, Legal and General recently published its claim figures for 2008 which showed that they paid out total claims of £146 million, with 93% of claims being accepted and their average claim being £70,000. More information on this can be found here.

Getting the Best Deal

When buying critical illness cover it is important to remember not to buy it based on lowest premium – you need to compare the different types of cover available, the conditions covered (together with definitions) and the claims experience of the various life insurance companies. We strongly recommend that you take Independent Financial Advice in this area before making a purchase.

Our next article on critical illness cover will consider further the benefits of such plans and the different purposes to which critical illness cover can be put.

We would welcome your comments on critical illness cover – do you own any? have you claimed on a policy?