Insurance: Critical Illness Insurance

Critical illness insurance pays out a lump sum if you suffer from one of a range of specified health problems.

Although critical illness insurance is sold by life assurers, it actually has nothing in common with life insurance. For a start, you don't have to die to benefit from the critical illness insurance policy. This insurance is designed to pay out a (tax-free) lump sum in the event of you suffering from a serious illness or if you have to undergo certain types of surgery.

The lump sum paid out by the critical illness insurance is to help with the extra costs of living with a particular condition but it's important to note that it only pays out if you contract one of a defined list of illnesses. In other words, if your illness isn't on the list, you won't get a penny.

Unless you have substantial savings (or other sources of income), some form of critical illness insurance may well make sense for you. How much you should have depends on your circumstances. Consider the lump sums that you might need in the event of contracting a serious illness; being able to pay off the mortgage, for example, or to make modifications to your home. If you're able to cover the necessary lump sums from your own or your partner's savings, then critical illness insurance may well be unnecessary and it may be more appropriate to concentrate on income protection.

However, assuming you do want critical illness cover, you'll not be surprised to hear that there is a wide range of policies available. The size of your insurance premium will depend on your age, sex, health, occupation, whether or not you smoke, the type of cover you need, and how long you need it for. Bear in mind you'll have to pay more if one of the core illnesses happens to run in the family. The best thing is to keep it simple.

Flexibility

Usually you'll pay a set premium for a set amount of time but some are flexible, so that you can increase the level of critical illness cover as you go. On the whole, though, as with life insurance, if you are doing a proper job of saving, you are likely to want your level of cover to be reducing rather than increasing. You don't want to be paying for something you don't need.

Joint critical illness cover

It is also possible to get policies which cover different people. You could have a joint policy with your spouse, but be careful with the small print; a policy might only pay out for the first of you to become critically ill. If you want cover for one of you, then you probably want it for each of you. You can also have policies that automatically cover your children when they reach a certain age. If you want this, make sure that your policy has it clicking in just as and when you want it to. As always, read the small print.

Combined critical illness and life insurance policies

Often you will find critical illness policies which are bundled in with a life insurance policy. There is nothing necessarily wrong with this, even though it doesn't really follow the 'keep it simple' approach.
However, if you go for one of these, make sure that it covers exactly what you want it to. You might find that a bundled product is cheaper than two individual ones but it might mean that the bundled policy only pays out once. So, if you contracted a serious illness and then died after two months, you (or rather your dependants) would find that a bundled policy, having paid out for the illness, does not pay out on your death. Separate policies would, of course, pay out for both and are probably preferable.

Total and permanent disability cover

Many critical illness insurance policies will also include cover for 'total and permanent disability'. This pays out if you become unable to work due to permanent disability arising from any illness or injury (regardless of whether it is listed in the policy).

Whether or not it is a good idea to include one of these clauses is debatable. Effectively it overlaps with income protection insurance. However there are small differences. First of all, critical illness insurance pays out a lump sum whereas income protection, would you believe, pays an income. Would you rather pay off your mortgage or be given the income to pay the premiums? Probably the former.
However, income protection insurance has one big advantage. It pays out for as long as you're off work (after a brief initial deferred period). You don't need to be permanently disabled, just unable to work. It is therefore possible that income protection will match your requirements better than a total and permanent disability clause in a critical illness policy.

"A great price with all the benefits I need for my family"

Paul Marshall, Birmingham