You might find you're offered a critical illness policy when you take out life insurance. Its aim is different to life insurance in that it's intended to provide financial security should you suffer a serious illness or injury.
The payout comes in the form of a tax free lump sum or regular payments to provide the necessary support in the event that you're unable to work because of a condition specified on the policy that you decide to take out, or if there are extra costs involved in managing that condition.
You're only covered if your condition is in that list of named illnesses and injuries though. These will vary by insurance provider but may include conditions like certain forms of non-terminal cancer, cardiac arrest, stroke, incapacity after surgery or a sufficiently serious physical disability caused by an injury.
Not all conditions are covered and not all levels of seriousness will be covered either. If your illness isn't included or your injury isn't significant enough to be covered, you won't get a payout. So it's crucial that you check the policy wording before you decide to sign.
Having said that, critical illness cover may be a good option if you don't have significant savings, especially if you have a mortgage or other large debt that you'll need to make arrangements for if you are incapacitated.
How much critical illness cover do I need?Your level of cover should be based on how much you'd need to pay off any debts, including your mortgage, as well as make any changes to your home in the event that you were debilitated by illness or injury. If you and your partner's savings don't adequately cover this calculation then you may need critical illness cover. If savings are sufficient then you may just need income protection insurance instead.
As with similar insurances the greater the amount and the longer the cover, the higher your premiums will be. The cost will also be determined by lifestyle factors like age, health, occupation and whether you smoke or not.
Unfortunately, any family history of illness may also affect the cost and particular illnesses may even be excluded from your policy.
What else should I be aware of?
Aside from straightforward critical illness cover you may come across the following:
- Flexible policy A flexible critical insurance policy may be offered as part of a whole of life policy and allow you to up your cover, and premium, over time as opposed to paying the set premium of a term assurance policy. Your individual circumstances will determine whether a flexible policy or the more usual fixed premium and level of cover is best for you.
- Combined life insurance and critical cover policy You may be offered a policy which bundles life cover and critical illness insurance. But it is vital to be aware that if you take a payout under the critical illness element the life cover can cease as these policies don't tend to pay out twice. Just as important to note is that if you take a payout because of a serious illness then, because of your health, you may not be able to get any further life insurance you then need. Make sure any bundled policy facilitates critical illness and life insurance separately, even if this costs more, or take out separate policies altogether.
- Total and permanent disability cover This kind of insurance can come under a critical illness policy to provide cover if you have to give up work because of permanent disability resulting from any illness or injury. The particular illness or injury doesn't have to be listed in the policy under these circumstances because the total and permanent disability element provides the cover. But you do need to check whether the policy covers incapacity to carry out any occupation or your own occupation. Premiums will be higher if you specify your occupation only but it is important that you get advice on this. This kind of cover may also overlap with permanent health or income protection insurance, so may be unnecessary. Critical illness cover however does pay out a lump sum compared to the regular payments under income protection insurance, which may be preferable if you need to pay off debts. Although you can take out both types of policies if you feel this is necessary and can afford it.
If you fail to maintain mortgage payments your home is at risk of being repossessed.
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This article (What is Critical Illness Cover?) is intended to provide a general appreciation of the topic and it is not advice.
For more information please contact Nurture Financial Planning Ltd on 01603 673502 or email firstname.lastname@example.org and we will be happy to assist you.
Article expiry: 05 Apr 2018