Do I Need Critical Illness Insurance, And If So, How Much?

Many people who take out life insurance often consider whether they should also take out critical illness coverage, as the two are intrinsically linked in many peoples’ minds. However, many either do not understand its purpose, do not need it, or underestimate how much they do need and this leads to the cover not being sufficient in the event that it is required or, conversely, in the individual paying significant amounts of money to guard against a risk that they don’t need to worry about.

What Is Critical Illness Cover?

Critical illness cover exists to provide financial security and peace of mind to individuals and their families, in the event that they are afflicted by a serious medical condition that will require them to change their lifestyle (for example, to give up work), attend numerous medical appointments or even modify or move home in order to accommodate their condition.

This all comes at a significant cost, so whilst life insurance pays out upon the death of the insured, critical illness cover provides a lump sum on diagnosis of the illness or condition to allow the person affected and their family to adapt to the diagnosis without needing to worry about how to fund everything that they will need to pay out for. This includes routine ongoing expenses such as mortgage or rent payments, food, electricity and running their vehicle, but also factors in the additional expenses that they now face.

Who Needs Critical Illness Insurance?

Many people in full time employment will be covered by their organisation’s group life insurance policy which may include some element of critical illness cover, enabling the organisation to continue to pay that person’s salary whilst they are on extended sick leave due to a serious medical condition. People who are covered by their work in this fashion may decide that they do not need to pay premiums separately for their own critical illness insurance. Some businesses will only fund sick pay for the first 6 months, after which point the individual will be moved onto Statutory Sick Pay which is likely to be significantly less than their usual salary, so it is important to understand exactly what benefits package your employer offers if you are relying on it instead of taking out your own insurance policy.

People with significant levels of personal savings, likewise, are unlikely to benefit from the protection offered by this type of insurance, as should they be taken ill, they will have the financial resources to allow them to continue to maintain their lifestyle and make whatever changes that they need to in order to adapt to their medical condition.

Some mortgages include life insurance within their payments to provide assurance to the mortgage company, and some of these will also include a level of critical illness cover. Generally, this cover declines over the term of the mortgage, and is only designed to provide sufficient funding to cover the mortgage payments, so whilst people with this cover may not have to worry about making their mortgage payments if they are taken ill and unable to work, they are unlikely to be left with any additional money to pay for medical treatment or home modifications that they need.

People who have few insignificant financial commitments, such as those living rent-free with family or who own their home outright, especially if they also do not have dependants, are unlikely to require critical illness cover, or if they choose to purchase such a policy, they are unlikely to require a large lump sum payout.

People whose partner also contributes equally to the family finances are less likely to require critical illness cover than those whose income is entirely relied upon by the family. This is because, should one partner be unable to work, there would still be money coming in which may be sufficient to maintain the family’s lifestyle and obligations for at least the short term.

Therefore, people who should consider whether a critical illness policy is right for them are those who:

• 1. Do not have any significant personal savings to fall back on to a level that would provide for long-term income.
• 2. Are self employed and would be unable to maintain their family’s lifestyle should they be unable to work.
• 3. Are employed but not covered by a suitable group life insurance policy.
• 4. Have a family history of significant medical issues that warrants the extra financial protection.

Critical Illness Insurance – The Finances

Insurance for critical illness is not cheap, often costing up to 6 times as much as an equivalent life insurance policy, so it is important that even if you fall into one of the four categories of people listed above who could benefit from having such a policy, that you are able to pay for it without overstretching your budget. It is important to consider that if you do not develop a critical illness within the term of the policy, it will not pay out and you will not get any of your premiums back.

If you decide that you do wish to take out critical illness cover, you will need to decide on the lump sum for which you wish to be insured. It is vitally important that you take the time to accurately work out how much money you would need, rather than simply selecting a large number that “feels” about right. This is because the lump sum is an influencing factor in the cost of your monthly premiums, and also because setting this figure too low could leave you in a difficult financial position should you be diagnosed with a critical illness during the term of the policy.

In deciding on the lump sum payout amount, you need to consider your individual circumstances:

1. How much outstanding debt do you have? This includes mortgage payments as well as credit cards and finance agreements.

2. What regular financial commitments do you have? Consider your monthly mortgage or rent payments, gas and electricity bills, food, and other household expenses.

3. What family commitments do you pay for? Do you pay for childcare, or provide money to a relative to support them financially?

4. Would your home still be suitable if you were diagnosed with a critical illness? Consider whether the doorways would accommodate a wheelchair. Do you have a downstairs toilet? Is your property accessible by an ambulance if one was required? If not, consider what it would cost to either make the necessary modifications or to move to a new home if the need arose.

5. Do you have savings that could offset some of the costs listed above?

Once you have calculated the lump sum that you would be likely to need, you can seek insurance quotes to compare the different offerings available. Remember to check what conditions are covered and that the exclusions are consistent to ensure that you do not inadvertently select a policy that offers an insufficient level of coverage, despite the appeal of the lower monthly premium.

If the monthly cost seems excessive or you are unable to afford it, you should consider alternatives to critical illness cover or decide whether you would be willing to reduce the lump sum payout amount to bring down the monthly payments, noting of course, that in doing so, you may be left short should you actually ever need the policy to pay out. If you decide to reduce the lump sum payout, you should re-do your costings to ensure that you know what you are sacrificing in order to do so. It may be that you will be paying off your mortgage in the next few years, or are soon to stop paying for childcare, in which case reducing the lump sum payout amount by this figure will be entirely appropriate and should not have any long-term impacts. However, deciding to knock tens of thousands of pounds off the payout amount simply to reduce the monthly payments may be a bad idea.

If you are concerned about making your monthly payments, you could discuss your finances with the [1] Money Advice Service or [2] Citizens Advice. Both organisations are independently set up by the government to support people in managing their finances. They offer impartial and practical suggestions for budgeting, debt reduction and financial planning which could help you to plan for your future, pay off outstanding debts and begin to build a savings pot which could negate the need for this type of insurance policy.

If you are healthy and do not have a history of critical illness in your family, you may choose to put an equivalent amount to the proposed monthly insurance payments into a high interest savings account, Premium Bonds or ISA in order that you can avoid taking out insurance but still have a level of financial security to fall back on should you be taken ill later in life.

Choosing Critical Illness Cover UK

It is important to choose not only the most affordable policy, but also the most comprehensive one. It is not money well spent if the policy that you choose does not cover you for the condition that you are diagnosed with.

It is essential to be entirely honest with your insurer as the price of your policy, as well as any exclusions placed upon it, will depend on your age and lifestyle as well as your chosen lump sum payout amount. Claiming to be a non-smoker when you are not will invalidate your claim should you be diagnosed with a condition linked specifically to your use of cigarettes.

Some life and critical illness cover excludes certain conditions and [3] all exclude conditions caused by alcohol or drug abuse, illegal or criminal acts or self-inflicted injuries. It is therefore important to understand what you will be covered for before you take out a policy.

Critical illness insurance will end should you fail to make a monthly payment, unless you have specifically chosen a policy that will self-fund if you are diagnosed with a condition that is covered by the policy, until such time as it pays out the lump sum and comes to a conclusion. Never assume that your policy will self-fund in this instance. If you fail to make a monthly payment for whatever reason, you will be left without cover and will not get back any of the premiums that you have already paid.

You will be able to choose a policy that is either fixed term (for example, for a period of 25 years to coincide with the time at which you pay off your mortgage or retire from work) or whole of life which covers you until you die. Whole of life cover is typically associated with critical illness and life cover being wrapped into one policy, whereby the policy guarantees to pay out, either on diagnosis of a critical illness or upon death, whichever happens first.

Choosing to bundle life cover and critical illness into one policy provides the ultimate in peace of mind but is usually only necessary in situations where a guaranteed payout is required, such as if the family home is owned on an interest only mortgage where a full payoff would be required to avoid the surviving family members being made homeless should the insured contract a critical illness or pass away.

Conclusion

There are many reasons why taking out insurance critical illness cover is a sensible thing to do but it is important to always fully consider your individual circumstances before doing so, ensuring that you can afford to make repayments, both now and in the future, and that you have selected the appropriate policy for your age, lifestyle, employment and financial situation.

References

• [1]www.citizensadvice.org.uk
• [2] www.abi.org.uk