No one likes to think about the worst happening. But a little early planning can save years of financial hardship if tragedy does strike.
Most people are familiar with life insurance. Some mortgage providers insist on it and many employers provide it for their staff. It is, in most cases, simple and cheap to set up. Anyone with liabilities or dependants should have life cover.
Income protection is the next priority for most people. This provides a regular income if you are unable to work due to illness. It’s a little more expensive than life cover, and a bit more complicated due to the options available. But many people face a chronic illness or disability at some point in their lives. The news has endless stories of people who have suffered through the Universal Credit claims process. So, while many people are not aware of income protection cover, most agree that it is worth having once the facts have been explained.
Critical illness is the final piece of the puzzle. Many people have it alongside their life cover, but are not entirely sure why, or if the cover amount is enough. Others may not be aware of the benefits, or believe it is too expensive, given the likelihood that it will probably (hopefully) never pay out.
We have prepared this guide to explain what critical illness cover is, when it might pay out and why you need it.
What is Critical Illness Cover?
A critical illness policy pays out a lump sum on diagnosis of a serious illness. Each insurer has a list of the conditions covered and the level of severity. The more comprehensive the cover, the more expensive the plan will be.
Critical illness plans can be set up to cover one person or a couple.
If the conditions for a claim are met, the sum assured will be paid out whether you are affected for life by your condition, or whether you are back at work in a few months.
When you set up a critical illness policy, your application will be underwritten. This means that the insurer will use medical evidence to decide whether or not they can offer you cover, and if your premium will be at the standard rate. As well as your medical history, the insurer will look at your family history, lifestyle and occupation to assess your application.
- There are a few different types of cover available:
Decreasing term – this is usually attached to a mortgage protection policy. The level of cover reduces over time in line with your mortgage. - Level term assurance – the sum assured remains the same throughout the term.
- Whole of life – some critical illness policies are designed to provide cover throughout your life. As there is a strong chance that such a policy would pay out at some point, these plans are usually very expensive and the premiums often increase with age.
- Proportionate benefit – certain insurers tier the level of cover depending on the severity of the condition. The sum assured is the maximum that would be paid out, either as a single sum resulting from a very serious illness, or a number of payouts arising from a series of less severe conditions.
Some plans offer other benefits in addition to the standard cover, for example:
- Children’s cover
- Medical support or counselling
- The option to maintain your cover, even if you are unable to pay the premiums.
Do I Need Critical Illness Cover?
It is usually worth taking out some level of critical illness cover if you can.
Critical illness cover can benefit you in the following ways:
- Critical illness cover can help to pay the bills if you are temporarily unable to work. It avoids using up your emergency funds or going into debt at an already stressful time.
- A critical illness plan can be used to pay off debt, easing the financial burden if you become seriously ill.
- For longer-term conditions, the cover can be used to pay for adaptations to your home or lifestyle, making things easier as you adjust.
- If you also have income protection cover, the critical illness plan can cover the immediate essentials during the deferral period. If you have critical illness cover, you can set up income protection with a longer deferral period. This will reduce your premiums. Although bear in mind that some conditions may be allowable for an income protection payout, but are not covered under a critical illness plan. It is always best to have an emergency fund in place.
How Much Cover Do I Need?
The amount of cover required will depend on your circumstances, but these factors may help you decide:
- How much debt do you have, and would this be affordable if you were unable to work?
- How many dependants do you have? Are you the main or sole earner?
- Do you have an emergency fund in place?
- What can you afford to spend on protection premiums, balanced with your other commitments and financial objectives?
A good financial planner will be able to help you work out a suitable level of cover.
Important Points to Check
If you already have critical illness cover, and it was taken out some years ago, check the conditions covered. Medical advances mean that an illness that would have been life threatening 20 years ago is no longer as serious. A modern policy may not offer the same level of cover as the insurer no longer deems some conditions to be ‘critical.’
In some cases, a plan can include critical illness and life cover. A critical illness claim may use up the plan benefits in full, leaving nothing if the insured person later dies. This is particularly important in the case of joint policies.
If it’s within budget, it is usually preferable to insure life and critical illness separately.
Please don’t hesitate to contact a member of the team if you would like to find out more about family protection.
