Our Complete Guide to Critical Illness Cover
Many of the clients we engage with are familiar with the concept of critical illness cover, with a significant number of them already holding such policies. However, there is frequently a misunderstanding about the specifics of their critical illness cover – specifically, what it does and doesn’t protect them against.
An unfortunate reality is that many clients lack the appropriate level of critical illness cover. Some are either underinsured in terms of the amount, or the duration of the cover does not align with their individual requirements.
In a multitude of scenarios, these clients have the opportunity to switch their existing critical illness cover to a more fitting alternative, potentially at an equivalent or even reduced cost.
A common oversight we’ve noticed is that most of our clients haven’t placed their critical illness cover in trust. Moreover, it’s important to note that many insurance providers have recently refined their critical illness cover definitions, suggesting they may provide better protection compared to some older policies.
In light of these insights, we felt compelled to write this post, with the primary aim of helping our clients understand the importance and affordability of critical illness cover, and guiding them about the various options they have at their disposal.
Critical Illness Cover Introduction
Do you need critical illness cover?
Many clients understandably question the need for critical illness cover, reluctant to pay for something they don’t think they need. So, they often ask, “Do I need critical illness cover?” My answer usually depends on their financial responsibilities.
If contracting a critical illness would impede your ability to support your dependents or manage liabilities such as a mortgage, then it’s a resounding yes – critical illness cover is essential. On the other hand, even if a critical illness wouldn’t affect your ability to provide for dependents or settle debts, critical illness cover might still be worth considering.
Why? Because the cover could provide a lump sum if you do get a critical illness, which can be a financial lifesaver. This payout can be used to modify your home to accommodate new health needs or cover the costs of expensive medical treatment.
In conclusion, it’s worth considering critical illness cover as part of a comprehensive financial protection plan, regardless of your immediate circumstances.
What is critical illness cover?
The preponderance of claims under critical illness cover are typically filed for conditions such as Cancer, Heart Attack, and Stroke. These three conditions, unfortunately, are prevalent, and thus, a significant proportion of critical illness cover claims pertain to them.
However, it’s important to note that the scope of critical illness cover has evolved and expanded over time. Nowadays, a comprehensive critical illness cover typically provides protection for more than 30 different illnesses. This broad coverage ensures that policyholders are protected against a wide array of health conditions that could significantly impact their life.
The range of illnesses covered under critical illness cover will vary from one provider to another. Some providers may cover more conditions than others, reflecting in the breadth of their critical illness coverage.
To give you a better understanding, we’ve included a provider comparison table below. This table will provide you with a comparative view of the various illnesses that different providers cover under their critical illness policy. By understanding the coverage offered by different providers, you can make a more informed decision when choosing your critical illness cover.
Remember, investing in critical illness cover is not just about preparing for the worst. It’s about securing peace of mind and ensuring financial stability should you face a significant health challenge. Therefore, consider your options carefully and choose a critical illness cover that best meets your individual needs.
What does a critical illness policy not cover?
Many clients confuse critical illness insurance with income protection insurance. The difference is that a critical illness policy will only pay out for one of the conditions covered in the plan, such as cancer, heart attack and stroke. The policy will not pay out for illnesses such as back pain, stress etc.
On the other hand, an income protection policy would pay out for the latter as long as the policyholder could not perform their job. Another major difference between critical illness insurance and income protection is that income protection pays out a monthly income, whereas a critical illness policy pays out a lump sum.
Critical Illness Cover Definition
A type of term life insurance that pays out a lump sum on the diagnosis of one of the policy’s listed definitions, such as cancer, heart attack or stroke.
6 Reasons You May Want a Critical Illness Policy
- To protect your mortgage liability.
- To provide a lump sum to be used by your family or dependents.
- To enable you to look after your children if they got a critical illness.
- To provide a lump sum that could be used to get expensive medical treatment on the diagnosis of a critical illness.
- To provide a lump sum that could be used to adapt the home for a disability that could result from the diagnosis of a critical illness.
- To Cover Key Persons or Shareholders when used in Business Protection Scenarios
Critical Illness Cover Advanced Options Explained
Decreasing Critical Illness Insurance
When applying for critical illness cover, you can choose whether the sum assured should remain level or decrease. A policy where the sum assured decreases throughout the term is significantly cheaper than a level policy.
Typical scenarios where the policyholder would choose a decreasing sum assured would be to protect a mortgage. If the mortgage is on a capital and repayment basis, the amount owed on the mortgage decreases over the term. To keep the cost of critical illness cover down, the policy would be set up to decrease at a predefined interest rate, such as 10%. In a case like this, as long as the mortgage interest rate does not go above 10%, then the insurance policy would be sufficient to clear the mortgage upon a claim.
Increasing or Indexed Critical Illness Cover
Another option for a critical illness policy would be an increasing policy or an indexed policy. This would be used if the sum assured would be used to provide an income or to provide for a family. The sum assured can be set to increase at a fixed rate annually, such as 1% to 10%. A popular practice is to increase the sum assured each year with the Retail Price Index RPI or National Average Earnings NAE. The practice of increasing the sum assured each year offers a bigger sum assured without additional underwriting. Increasing the sum assured or indexation helps the sum assured from becoming eroded and helps keep the sum assured and keep pace with inflation.
Guaranteed or Reviewable Premiums
Guaranteed rates – the premium is guaranteed throughout the term of the policy and would only change on the basis of pre-determined escalation increases – e.g. RPI or 5% p.a. Reviewable rates – the premium is reviewed after regular periods, normally 5 years, and may change according to a general change in rates in the light of claims experience.
Typically unless the budget is of major importance, then I always recommend Guaranteed premiums. Sometimes insurers only offer reviewable rates for older applicants or if the policy end date takes the applicant above a certain age.
Total and Permanent Disability
Some insurance providers automatically include total and permanent disability coverage in their critical illness cover policies. However, with others, you’ll need to add this benefit when you apply. What does this mean? Well, with this benefit, you don’t have to meet one of the listed critical illnesses in the plan to make a claim. Instead, you need to meet the provider’s criteria for total and permanent disability. These criteria can differ from one provider to another, and they’re also influenced by the details you provide when you apply – like your job and your medical history.
Insurance providers usually define total and permanent disability in these ways:
- You can’t do your own job ever again.
- You can’t do any job that you’re suited for.
- You can’t do any work at all ever again.
- You can’t do a certain number of everyday tasks.
The types of everyday tasks they consider can vary, but they usually include things like washing, cooking, walking, bending, and getting in and out of a car.
So, if you’re considering critical illness cover, make sure you understand how different providers handle total and permanent disability. This way, you can choose the critical illness cover that suits you best.
Standalone or Integrated
Some single people who have no dependents do not want life cover and want cover for critical illness cover only. This type of policy is called standalone critical illness insurance. On the other hand, a policy that includes life and critical illness on one policy together is called integrated critical illness cover. You would think that a standalone policy offering critical illness cover only would be cheaper than an integrated policy offering both life and critical illness. However, because nearly all life providers offer integrated and very few offer standalone policies in many cases, it can be cheaper for the policyholder to apply for a life and critical illness policy.
Accelerated or Additional Critical Illness Policy
Most critical illness covers work like this: they pay out once. So, if you get very sick or pass away, the insurance pays out, and then it’s done – no more cover. This kind of cover is usually the cheapest and is often called ‘accelerated’ critical illness cover.
There’s another type of cover called ‘additional’ critical illness insurance. It’s a bit more expensive but works differently. If you get very sick and the insurance pays out, it doesn’t end. The insurance keeps on protecting you. So, if something worse happens later, like if you pass away, your cover can pay out again.
Renewable Contracts are plans where the policy is completely renewed at the end of a specific period, normally 5 years, on terms available at that time.
Waiver of Premium
Waiver of Premium is used to continue the policy in the event of the client becoming disabled or ill and unable to work for longer than (usually) 26 weeks. In this event, the insurance company will pay the premiums until the client is able to return to work. Whether this option would be beneficial or not would depend on what your sick pay arrangements are through your employer.
Example Critical Illness Scenarios
Critical Illness to Protect a Mortgage
A mortgage is normally a very large debt. When a lender assesses the affordability of the mortgage, they usually take both applicants’ income into account. Therefore it would be safe to assume that if only one income remained, the remaining mortgage holder would struggle to maintain the mortgage payments along with all the other outgoings.
A typical mortgage might be £100,000 in joint names taken on a repayment basis over 25 years. In this case, the applicants would apply for a joint life and critical illness policy for £100,000 on a decreasing basis over a term of 25 years. If either of the policyholders were to die, then the remaining policyholder would receive a sum large enough to pay off the remaining mortgage balance.
Critical Illness to Protect a Family
Another common use of critical illness insurance is to protect family income or to be used as a lump sum to help a family if either of the parents became ill or dies. A typical example may be a husband and wife who have 3 children. The youngest child is 5 and they expect their children to remain dependantsAny individuals who depend on the borrower for financial sup... until they are age 21. They could take a level life or critical illness policy on a joint basis. However, as the applicants have dependants, I would instead strongly recommend that 2 single policies are taken out instead. This way if both parents should die together, the sum assured would double. Another added benefit is the children’s critical illness cover that is normally offered with each policy is also doubled. The extra premium for having 2 policies is typically only very slightly more than 1 joint policy.
What Next – How to Apply for Critical Illness Cover?
One option is to use price comparison websites and go it alone. You can use the information above that may help some of you get suitable cover. However, we would suggest using a protection adviser like ourselves. The benefit of this is that they can identify your situation and recommend the most suitable solution for you.
We make the process as straightforward as possible and fill in all the paperwork for you. If we deem it suitable to put the policy in trust, We do this as part of the service for free. You will find the quotes we provide both competitive and explained in straightforward, jargon-free language.