Critical Illness Insurance Guide

What is Critical Illness Insurance?

Critical illness insurance cover supports you financially if you’re diagnosed with one of the illnesses listed in the policy.  The tax-free, one-off payment helps pay for your treatment, mortgage, rent or changes to your home, such as wheelchair access, should you need it. 

Life Insurance and Critical Illness Insurance

Critical illness cover can be purchased on a standalone basis.  But most people buy life insurance with critical illness cover.  This is often when they are taking out a mortgage. 

This can be on a:

• Level-term basis, where the chosen sum insured (i.e. the size of the payout you want to receive when you claim) is fixed for the term of the policy

• Or it can be on a decreasing-term basis, where the sum insured shrinks in line with your mortgage

However, when you take out the two policies, they can be arranged in different ways:

• If you buy the critical illness element as “additional cover” alongside life insurance, the policy will pay out if you are diagnosed with one of the conditions listed in the policy, and if you die

• Vs. combined or accelerated cover, which only pays out once.  This is on diagnosis of critical illness or on death

What does critical illness insurance cover?

Critical illness insurance will pay out if you get one of the specific medical conditions or injuries listed in the policy.  It only pays out once, after which the policy ends.

The conditions and illnesses covered will vary between insurers.  The most comprehensive policies cover 50 different conditions or more, but others are much more limited.

Examples of critical illnesses that might be covered include:

• Stroke

• Heart attack

• Certain types and stages of cancer

• Conditions such as multiple sclerosis

• Major organ transplant

• Parkinson’s disease

• Alzheimer’s disease

• Multiple Sclerosis

• Traumatic head injury

Most policies will also consider permanent disabilities as a result of injury or illness.

Some policies will make a smaller payment for less severe conditions, or if one of your children has one of the specified conditions.

But not all conditions are covered. Common exclusions include:

• Terminal illness (defined as life expectancy of less than 12 months)

• Non-invasive cancers

• Hypertension (abnormally high blood pressure)

• Injuries such as broken bones

Most policies will also state how serious the condition must be to qualify for a payout.

Why get critical illness insurance?

If you were unable to work due to a serious illness, you might assume that your employer will continue to give you some level of income, or that you’ll be able to rely on benefit payments.  In reality, however, employees are usually moved onto Statutory Sick Pay within six months.  State benefits might not be enough to replace your income if you’re no longer able to work.  If you qualify, Employment and Support Allowance ranges from £84.80 a week to a maximum of £129.50 a week (2023/24 figures).

You should consider getting critical illness cover if:

• You and your family depend heavily on your income

• You don’t have enough savings to cover ongoing expenses (such as bills, mortgage payments or rent) if you become seriously ill or disabled

• You don’t have an employee benefits package to cover a longer time off work due to sickness

How much does critical illness cover cost?

Critical illness insurance is more expensive than life insurance because you’re more likely to claim on it during your working life.  The risk of becoming seriously ill is much greater than the risk of death (source: insurer Royal London, 21 December 2020: https://studio.royallondon.com/docs/reportcic-example.pdf).  For example, a 40-year-old non-smoking man is 4.1 times more likely to suffer a critical illness, than die before the age of 65.

Monthly payments (premiums) can vary widely, depending on the policy and your circumstances.

Critical illness policies cover a wide range of illnesses, conditions, and situations.  So it’s important to compare what different insurers can offer you.

Cost is affected by:

• Your age

• Your lifestyle – e.g., whether you smoke and how much you drink

• Health – your current health, weight, any pre-existing medical conditions you might have and family medical history

• Job – some occupations are higher risk than others, making the premiums higher too

• The sum insured

• Length of the policy

If you’re considered at risk of a particular condition – perhaps because of existing health issues – that illness could be excluded from the policy.  Or you might have to pay a higher premium.

The cost will also depend on whether you pay a reviewable or a guaranteed premium:

• Reviewable premiums are usually reviewed after a certain period of time, usually every five years.  At each review point, they’re likely to increase.

• Guaranteed premiums remain fixed for as long as you have the policy.  These can cost slightly more in the short-term.  But many people like the security of knowing what they’ll be paying in future.

You can reduce the cost of your cover by living a healthy lifestyle and shopping around for the best price.  You can also save by combining it with life insurance.  However, this may reduce the total amount you are able to claim.  We can help you navigate all of this.

How much critical illness cover do I need?

You can adjust the amount of cover you take out according to your needs and monthly payments

Critical illness insurance is typically taken out alongside other types of insurance, such as life insurance or income protection.  It’s often combined with a life insurance policy.

Good things to think about include:

• How much is left owing on the mortgage?

• What other big debts are there, e.g. car, credit card, loans?

• Dependents

• What financial commitments do you have, e.g. school fees or rent?

• How much would you need if you weren’t able to work? What is the minimum you could live on each year without your salary?

• Work benefits

• How much do you have in savings?

• How long do you have left until you draw your pension?

• Other insurance products you have

How do I buy critical illness insurance?

Critical illness is a potentially complicated product, and there can be a lot of stress and heartache when a claim isn’t paid out.  The best way to get what you need is to get advice from an independent financial adviser or specialist broker (like us!).  We can take you through the details of the various policies available and make sure you choose the right one.

IFAs might charge a fee for their services, or they might be paid in commission by insurance companies (we don’t charge fees). 

Income protections vs critical illness cover: Which is best for me?

So, as we know, critical illness pays you a lump sum if you are diagnosed with a condition that’s included in the policy.  Income protection insurance, on the other hand, pays you a regular income if you’re unable to work, which usually stays in place until:

• You can work again

• You reach retirement age

• Death

Critical illness cover usually has a higher payout overall.  It might be suitable if you want to cover a certain cost, like clearing the mortgage or paying school fees.

Income protection only stays in place until you can work again, and is designed to cover your usual salary for that period.

Because the policies are designed to cover different eventualities, you might want to have both kinds. It’s not an either/or situation, where one is a direct replacement for the other.  We can help you work out what insurance is best for your needs.  

Considerations and Risks

·       Life Assurance plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.

·       Plans may not cover all the definitions of a critical illness. The definitions vary between product providers and will be described within the Key Features and policy documentation if you proceed with

·       Failure to disclose any requested or relevant information may adversely affect any future claims

·       Payment will not be made for a critical illness claim arising from an excluded condition (relevant to Critical Illness only)

·       The present tax free treatment of the policy benefits may change

·       If this policy is to replace any existing policy offering the same type / level of cover, you must not cancel any existing policy until the new policy is in force