My Complete Guide to Critical Illness Cover

damianyouellMany of the clients I speak to have previously come across critical illness policies and many have these type of policies. Many do not really understand what is covered and what is not covered. Lots of the clients have the wrong amount of cover and many have the cover for the wrong number of years. In many instances clients could replace the cover they currently have with something that is more suitable for a similar or cheaper price.

In addition to the problems above most of the clients I see do not have the policies in trust. Plus recently many providers have now enhanced their critical illness definitions and therefore may offer better cover than some older policies.

I therefore decided to write this post to help guide clients about the uses and options of this affordable and very important insurance type.

Critical Illness Cover Introduction

Do you need critical illness cover?
Understandably clients do not want to pay for something they do not need and thus many ask me whether they need critical illness insurance. My answer is normally that if the ability to provide for dependants or to pay for a liability such as a mortgage is affected by the client getting a critical illness then yes you need it. If you the ability to provide for dependants or pay debts is not affected by the client getting a critical illness then the client may still want to get some critical illness so that they could get a lump sum if they did get a critical illness perhaps to be used to adapt the home or use for expensive medical treatment.

What does critical illness cover? – The majority of claims under a critical illness policy are made for Cancer, Heart Attack and Stroke. Although these days critical illness conditions covered normally include 30 plus illnesses. The list of illnesses that each provider offers are shown in the provider comparison table below.

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 lumps 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 dependants.
  • 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 the amount owed on the mortgage decreases over the term. To keep the cost of the 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 assure each year with the Retail Price Indexe 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 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 budget of a 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
With some providers the policy automatically covers total and permanent disability. For other providers this benefit needs to be added at application stage. With this benefit the person who is insured does not need to meet one of the critical illness conditions in the plan to claim. Instead they need to meet the providers criteria of a total and permanent disability. This varies from provider to provider, it also depends on the initial underwriting and in particular whether the applicants occupation and existing medical history.
The providers tend to offer Total and Permanent Disability in the following ways:

Unable to do your own occupation ever again.
Unable to do any suited occupation.
Unable to do any occupation ever again.
Unable to carry out a certain number of activities of daily living. These activities of daily living vary from insurer to insurer, typical activities include Washing, Cooking, Walking, Bending, Getting in and out of a Car etc.

Standalone or Integrated
Some single people who have no dependants 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
Nearly all critical illness policies payout once. That is if the policy holder dies or gets a critical illness then the policy finishes and no more cover is provided. These are the cheapest form of critical illness insurance. This type is known as accelerated. Another less common and more costly policy is known as “additional” critical illness insurance. With this type of policy if the policyholder gets a critical illness and makes a claim then the policy continues for the life part of the policy. Therefore if the later die the the policy holder can claim 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 died. 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 dependants 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?

Direct or Financial Adviser
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 I would suggest using a protection adviser like myself. The benefit of this is that they can identify your situation and recommend the most suitable solution for you.

I make the process as straight forward as possible and fill in all the paperwork for you. If I deem it suitable to put the policy in trust I do this as part of the service for free. You will find the quotes I provide both competitive and explained in straight forward jargon free language.