Despite its off-putting name, critical illness is a vital form of insurance which will pay you a lump sum if you are diagnosed as suffering from one of the serious illnesses which is covered by your particular policy.
Suffering from a critical illness can have serious impact on your life. It is likely that you will be unable to work, so your income will be reduced while you are on the road to recovery. But your regular household bills will still need to be paid.
A lump sum payment from a critical illness policy can help you reduce or even pay off your mortgage. It could also provide funds to help you pay for private treatment or to make modifications to your home so that you can cope with any disability you may have incurred.
Critical illness insurance is a valuable policy that can help to remove the stress of money problems at a time of serious ill health and help you adapt to life after your illness.
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What illnesses are covered?
Critical illness policies provide cover for a number of different critical illnesses.
All critical illness policies will include cover for cancer (excluding less advanced cases) and heart attack (of specified severity), which account for the majority of claims. In addition to these conditions, most policies will include cover for a variety of other illnesses. The average number of conditions covered across the market is 27, although some policies cover as many as 38 different conditions.
Below is a list of the conditions that are covered by 50 per cent or more of critical illness policies on the market:
- Alzheimer's disease
- aorta graft surgery
- aplastic anaemia
- bacterial meningitis
- benign brain tumour
- blindness
- cancer
- children’s critical illness benefit
- coma
- coronary artery bypass
- Creutzfeld-Jakob disease
- deafness
- heart attack
- heart vale replacement
- HIV infection
- kidney failure
- loss of hands or feet
- loss of independence
- loss of speech
- major organ transplant
- motor neurone disease
- multiple sclerosis
- paralysis of limbs
- Parkinson’s disease
- pre-senile dementia
- stroke
- terminal illness
- third degree burns
- total permanent disability
- traumatic head injury
Understanding what your policy covers
It is essential that you understand that a critical illness policy will only pay out:
- on the illnesses covered;
- if the severity of your illness meets the requirements of the insurer’s definition; and
- under some policies, if the illness has persisted for a certain length of time or has caused some permanent impairment.
For example, the cancer definition is not designed to cover every one of the 200 or so types of cancer that exist. It is intended to provide cover for more advanced cases. In addition, some early stage cancers and those that do not spread will not be covered.
Survival period
Another feature to be aware of is that critical illness benefit will only be paid if you survive for a certain period after you meet the claim requirements. Under most policies this is 14 days, although under some policies it could be as long as 28 days.
Cover for children
Many policies will automatically provide cover for your children until they reach the age of 18. The amount payable and the definitions that apply to the cover for children may be different from the main policy. After payment of a children’s critical illness claim, the main critical illness cover carries on and cover for any other children named on the policy will continue, but you can only make one claim per child.
When you take out a critical illness policy make sure you read the definitions to understand what the policy will, and will not, cover.v
Total permanent disability cover
Most critical illness policies include total permanent disability cover, in addition to illness specific cover.
Claims for this element of cover are not based on diagnosis of one of the listed critical illnesses. Instead, to qualify for this benefit, your health must be so severely impaired that you are permanently and totally unable to work.
To assess whether you qualify, the insurer will consider your level of incapacity and ascertain whether you will ever again be able to do your own job, any job, or any job to which you are suited. Under some policies, the insurer may assess this benefit against your ability to perform a number of activities or tasks.
If you meet these very stringent claim criteria, the full benefit will normally be payable and the policy will end.
Different types of critical illness policy
Critical illness insurance is usually set up to cover you for a specific term, perhaps to match the term of a mortgage. It is also possible to arrange cover for the whole of your life.
When critical illness cover is arranged for a specific term it can be arranged in one of the following ways:
Level Term
The amount of cover remains the same throughout the term of the policy. Such policies are normally used to cover an interest only mortgage or to provide family protection.
Decreasing Term
The amount of cover reduces each year, decreasing to nil at the end of the term. The cover can reduce by a fixed amount each year, or in line with a repayment mortgage to match the reducing debt.
Family Income Benefit
This type of policy is ideally suited to providing your family with a replacement income. If you suffer critical illness during the term of the policy, a regular income is paid to you for the remainder of the policy’s term.
The income can be paid monthly, quarterly or yearly. Some policies provide an income which increases by a fixed rate each year, for instance by 3 or 5 per cent.
Critical illness with life cover
It is possible to arrange critical illness cover, with or without, life assurance cover.
When you arrange a critical illness policy with life cover, the policy will pay out either on your death, or on diagnosis of a critical illness, whichever happens first.
WARNING!
It is, therefore, important to understand that if the policy pays out for critical illness, the policy will come to an end and the life cover benefit will be lost. Arranging cover in this way is an economical way of providing cover for a mortgage debt against death or critical illness.
Critical illness without life cover
It is possible to arrange critical illness cover without integrated life cover. Under this type of policy, the lump sum benefit will only be paid out if you satisfy the claims criteria for one of the listed conditions. If you die, the policy will end and no benefit will be paid.
Other features
Some critical illness insurance polices offer other options, at extra cost, which provide added protection for you and your family.
Inflation protection
Critical illness policies are designed to provide long term protection. Over time, inflation can erode the value of what was once an adequate level of benefit. This is particularly important if your insurance has been taken out to protect your family.
Many policies include a valuable option whereby your cover increases in line with inflation each year, but remember that as the amount of cover increases, your premium will go up as well.
Waiver of premium
Some policies include the option to take waiver of premium. This ensures that the premiums payable to your policy are maintained, if you are unable to work due to long term sickness or disability.
This starts after a certain period of time (the deferred period) following your incapacity. This can be one, three, six or 12 months depending on your circumstances and the particular policy you have chosen.
Increasing cover
Marriage, the birth of a child, divorce and moving home can all bring with them additional financial commitments and the need to review your critical illness cover.
You could, of course, take out a top-up policy. However if your health has deteriorated since you took out the original policy, this may not be possible. In any event, it could prove time-consuming and expensive.
Some policies include ‘insurability options’ that allow you to increase the cover within a set period following a major life event such as marriage, birth of a child or increasing your mortgage.
Currently, over three quarters of critical illness policies include guaranteed insurability options.
When might my policy not pay out?
A critical illness policy will not pay out if your illness does not meet the definition stated in your particular policy. In addition, if you did not fully disclose all details of your medical history when applying for the cover, the insurance company may refuse to pay a claim.
Most policies include standard exclusions, but these vary from policy to policy. The most common exclusions are;
- alcohol/drug abuse
- participating in a criminal act
- HIV/AIDS, except where covered by the policy
- refusal to seek or follow medical advice
- self-inflicted injury
- war and civil commotion
WARNING!
- Be sure to read the policy’s terms and conditions so that you understand what the policy does, and does not, cover.
- Be scrupulously honest about your medical history if you want to avoid having a claim turned down because of ‘non disclosure.’
Even a minor medical condition could be deemed relevant by your insurer and cause it to reject a claim if it felt that you had deliberately hidden relevant information. This could happen even if the nature of the non disclosure did not relate directly to your claim.
How much will it cost?
It is important to remember that taking out critical insurance gets more expensive as you get older. This is because premiums for critical illness policies are based on a number of factors including your age when the policy starts, so the younger you are when you take out a policy the better.
Other factors affecting your premiums are your gender, state of health, lifestyle, whether you smoke, how long you want the cover for and, of course, the amount of cover you require. In addition, critical illness insurers will look at your family medical history when assessing your application.
Premiums and cover vary from insurer to insurer, so it is important to check the whole market to find the company that offers the best terms for you.
Guaranteed premium rates
60 per cent of critical illness policies offer guaranteed premium rates, which means that, unless you change the policy, the premium you pay will remain the same throughout the term of the policy.
Although guaranteed premium rates are more expensive than reviewable rates, they provide certainty that the cost of the insurance is not going to increase, unless you change the policy.
Reviewable premium rates
Some policies entail premium rates that are reviewable, which means the insurer will review your premiums every five years, although some review premiums more frequently.
WARNING!
It is important that you read the terms and conditions of the policy and that you understand the basis on which the insurer can review your premiums.
The figures in the table below provide an example of the costs of some of the different types of policy discussed earlier.
|
|
Life & Critical Illness |
Life & Critical Illness |
Stand Alone Critical Illness |
|
|
£100,000/20yrs/ Guaranteed rates |
£100,000/20yrs/ Reviewable rates |
£100,000/20yrs/ Guaranteed rates |
|
Male 30 next birthday |
£23.30 |
£20.60 |
£23.13 |
|
Female 30 next birthday |
£23.44 |
£20.54 |
£23.23 |
|
Joint Life |
£41.49 |
£36.56 |
£41.06 |
Source: The Exchange – 30 August 2007
As with any purchase, price should not be the overriding factor when deciding which policy to buy. It is essential that you find a policy that is suitable for your current needs and that can adapt to meet your future needs.
How do I buy critical illness insurance?
We recommend that you seek advice from an independent financial adviser before buying critical illness insurance so that buy a policy that is fit for purpose. This is because an independent financial adviser is able to make a recommendation from the whole of the market.
Once you and your adviser have selected a policy, you will need to complete a proposal form which will ask you about the cover you want, your health, lifestyle and your family medical history. As stated above, be sure to own up to all past medical conditions, even if they seem irrelevant to you at the time.
The adviser will pass this form to the insurance company which will consider the information you have provided. If you are applying for an especially large amount of cover (usually over £400,000), or you have a history of ill health, the insurer may write to your GP for more details. In some circumstances, it may also ask you to undergo a medical examination with an independent doctor.
Once the insurer has all the information it requires, it will issue an acceptance letter, confirming the basis of the cover and the premium it requires you to pay. Occasionally, where an applicant has a history of ill health, it may charge a higher premium to reflect the increased risk. High blood pressure, obesity and diabetes are examples of conditions that could give rise to higher premiums. If the condition is very serious, the insurer may decline to offer cover.
Once you have accepted the terms offered, the policy can then be put ‘on risk,’ from which point you are covered.
Last edited August 2007
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