Critical Illness Cover with Life Insurance: The Need

Whenever you take out an insurance policy, you consider the balance of value and cost in deciding whether it is sensible to invest in an appropriate policy or to put money into savings to pay for the potential outcome that the insurance policy is guarding against.

There are some insurances that are non-discretionary, such as car insurance, but others, like critical illness insurance and life insurance, are optional and it is up to each individual to examine their personal circumstances and decide whether or not to opt for them.

What is critical illness cover?

It is a form of insurance which provides you with a tax-free lump sum payment should you fall ill with a critical condition covered by your policy.

This type of insurance policy is designed to give you the money that you need to provide yourself and your family with financial security in the event that you are unable to work due to contracting a serious medical condition. The money can be used for whatever purpose you see fit, such as making any necessary adjustments to your home, investing in equipment to help you maintain independence, paying off your mortgage or other debts, and providing for your family whilst you’re unable to do so. You could even use the money to finance private medical treatment.

It is a useful type of insurance for anyone who is concerned that they would be unable to provide for their family should they become seriously unwell and unable to work.

Who needs critical illness insurance?

Contracting a serious medical condition can happen to anyone at any point in their lives and when it happens, it can have a significant impact on a family’s finances and lifestyle. This type of insurance policy is designed to provide protection against loss of income due to an inability to work, providing a lump sum payout to be used as deemed fit by the individual covered.

What are my options for insurance for critical illness?

There are three options available if you feel that you need to take out an insurance policy to guard against the possibility of you developing a critical illness.

1. Critical illness insurance. As detailed above, this type of policy pays out should you become critically ill, provided that the condition that you have developed is covered by the policy. Standalone critical illness cover UK is often more expensive than life insurance because on the balance of probability, you are more likely to claim on this type of policy than on a life insurance policy.

2. Life cover and critical illness. A critical illness and life cover policy allows you to add two types of insurance into one policy, however, it is important to note that the policy will only pay out for either critical illness or death, whichever happens first during the term of the policy. Therefore if you receive a critical illness payout, the policy will end and there would be no further payout should you die.

3. Income protection insurance. Also known as permanent health insurance, this type of policy is designed to pay you a regular income of up to two thirds of your previous pre-tax salary if you are unable to work due to sickness or disability and will continue to pay out until such time as you return to paid work or reach retirement age.

How do I choose the right policy?

It is a risk-based decision as to which policy you purchase and whichever option you choose, there is a chance that you could pay your premiums every month for decades and never need to claim. If you have a secure job, a low mortgage, no other debt and your spouse or partner is financially stable, then you may have less need for this type of insurance than you think. You may wish to discuss your personal circumstances with a financial advisor [1] who could suggest alternative ways of investing your money to provide for a potential point in time where you are not generating an income.

You need to understand firstly why you wish to take out a personal insurance policy – is there a family history of medical issues, do you have large debts, is your family dependent on your income? Once you understand why you wish to purchase critical illness coverage, then you can begin to choose the policy best suited to your individual circumstances.

If your reason for taking out life and critical illness cover is because you are concerned that you don’t have sufficient funds in reserve, should the worst happen, or you are already struggling with debt, then you may wish to discuss your financial situation with either the Money Advice Service [2] or a debt charity such as StepChange [3]. Either of these would provide free and impartial advice, tailored to you, to help you to adjust your financial situation with support on debt management, budgeting and financial planning.

Ultimately, the right policy is the one that best suits your individual circumstances so before you take out a policy, it is important to determine the type of policy you need and the level of cover that you would require in order to provide financial stability to your beneficiaries.

To choose the right policy, you need to first decide whether you want a combined life and critical illness policy, a standalone critical illness policy or an income protection policy.

You then need to decide on the term of the policy. Your options are for a term or whole of life.

Term cover

This provides insurance to cover a set number of years – usually up to 40 years – paying out should you fall ill or die (depending on the option chosen) within that timeframe. If the policy expires before you are either taken critically ill or pass away, you will not benefit financially from such a policy.

A term policy can be further broken down into a level payout or a decreasing payout based on your individual preferences. A level payout guarantees the same payout regardless of the point at which you claim, whereas a decreasing payout reduces every year in line with your mortgage, childcare obligations or other criteria set at the outset.

Whole of life

This type of policy covers you for as long as you maintain the monthly payments, meaning that should you have chosen a life insurance policy, your dependents are guaranteed a payout at some point. If you have a critical illness whole of life policy, there is a chance that it will never pay out should you pass away from an illness that is not covered by the policy.

You will need to decide the size of the payout that you would require from whichever policy you choose. You can do this by calculating the outstanding balance of your mortgage, or your rental payments for the foreseeable future, the value of any debt that you or your family have, your childcare costs until at least your youngest child turns 18, your annual salary until retirement and any costs associated with your funeral or probate. This figure should provide the basis of what your family would need to maintain their standard of living if you were no longer with them.

Your insurance provider will use this information, together with your age, health status, occupation and lifestyle to provide you with a quote for cover. An insurance provider can reject your claim if they discover that you have provided false or misleading information so it is important to always be honest when taking out a policy.

It is always sensible to seek quotes for both standalone and combined policies, and you may even be eligible for a joint policy with your spouse or partner which would provide an additional level of protection, noting that both of you would be covered. This means that should the first partner die, the remaining partner can claim for their lump sum whilst their critical illness cover would continue. Even if your partner is not in paid employment, the financial value of their role can be calculated in terms of what it would cost if you needed to pay someone else to do what they do for free – for example, maintaining the home, cooking, providing childcare and so forth.

Based on the outcome of your quote comparison for combined and standalone policies and a risk assessment of your personal circumstances, you may choose to take out two separate policies – one for life insurance (with a large payout designed to pay off your mortgage and bills) and one for critical illness (with a smaller payout designed to maintain family finances for a predetermined period of time) – in order to spread the risk and potentially lower your overall monthly payments.

What does insurance critical illness cover?

Most policies of this kind will pay out if you are diagnosed with any of the conditions covered by their policy and survive for a predetermined period (usually two weeks). Generally, cancer, heart attacks and strokes are covered and most policies also cover childrens’ critical illnesses as well, noting that should a child become seriously ill, at least one parent or caregiver is likely to have to give up work to care for the child full time.

What does this type of policy exclude?

You should always check the exclusions before taking out any insurance policy to ensure that you understand and are comfortable with them. In general, this type of policy will not pay out if you stop paying your premiums, are diagnosed or treated for a condition not covered by the policy or that does not meet the insurer’s definition of a critical illness, or pass away pre-diagnosis (if you have a combined life insurance and critical illness policy then you would be covered by the death element in this particular instance).

Some policies exclude certain types of cancer and others state that you have to suffer from permanent symptoms in order to claim for some conditions.

This is an insurance product which can become very complicated and create a lot of heartache and stress should a claim be rejected. Therefore, it is wise to discuss your requirements in detail with your policy provider before signing on the dotted line or seeking guidance from the Citizen’s Advice [4] team before taking out a policy, especially if you are doing this to guard against a lack of savings or concern over future financial planning.

Summary

For some, including critical illness cover in their life insurance policy can provide much-needed peace of mind but for others it can be a very expensive and unnecessary expenditure. Because everyone is an individual, it is important to consider your reasons for wanting this type of cover, examining your options, and if you decide to proceed, ensuring that you have selected an appropriate level of cover to provide the necessary financial stability should you ever need to make a claim.

References

• [1] www.fca.org.uk
• [2] www.stepchange.org
• [3] www.citizensadvice.org.uk