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Critical Illness Insurance Guide

Introduction

Two of the most powerful motivating factors known to human beings are fear and greed.

We behave in certain ways either because we covet the benefits that might accrue from doing so, or because we are afraid that we may lose out otherwise.

Critical illness insurance (CI) is sold directly on the basis of fear.

That is, it connects with everyone’s worry about the possibility of contracting cancer, or a stroke, or even a heart attack – illnesses that have the power to kill or leave you in pain and facing lingering disability.

Not for nothing was critical illness cover once called “dread disease” insurance.

Is critical illness cover worth having?

Here are some facts:

• One in three people in the UK will contract cancer at some stage and more than 1 million people suffer from it at any one time

• More than 260,000 people suffer a heart attack every year – of which half are survived. Meanwhile, 1. 4 million people suffer from coronary heart disease

• One woman in four and one man in five will suffer a stroke at some stage in their lives

• About 18,000 patients currently receive kidney dialysis each year

• About 85,000 people have MS, with 2,500 new diagnoses made each year

• Over 120,000 people have Parkinson's Disease, while 180,000 people are diagnosed as suffering from an Alzheimer’s-type disease each year.

The important thing to keep in mind is that most of these illnesses are survivable.

About 77% of people aged 35-54 who have a heart attack, for example, will live on for at least another five years.

Resuming work is another matter, coupled with the knowledge that statutory sick pay need only be paid by an employer for a brief period.

Critical illness insurance aims to remove this worry. It pays a sizeable, tax-free lump sum on diagnosis of a specific life-threatening medical condition or if the policyholder becomes disabled and is unable to work again.

Unlike life assurance, which pays out a lump sum to dependants but only on a policyholder's death, CI is paid on immediate diagnosis of an illness.

What critical illness cover protects against

There some core diseases common to all policies:

• Cancer

• Heart by-pass surgery

• Heart attacks

• Kidney failure

• Major organ transplants

• Multiple sclerosis

• Strokes

Some policies contain a far longer list, including Alzheimer's, Aids or motor neurone disease. Whether you actually need cover against them is another matter.

Total permanent disability – typically the result of an accident – is sometimes covered, and is worth having.

How critical illness insurance works

The policy is a bit like term life assurance. You pay monthly premiums for an agreed period of time. Should you be diagnosed as having one of the illnesses set out on your policy, the insurer will pay out an agreed tax-free lump sum.

Should your policy expire without you having contracted any of these illnesses, you receive nothing.

How to buy critical illness insurance

Before you do, find out whether your employer offers critical illness as part of your workplace benefits. Increasing numbers do, or in a few cases you can select critical illness as something you want from a “menu” of benefits on offer to staff.

Here are a few issues you should be thinking about:

1. How much cover do you need? Most people tend to look for a lump sum large enough to pay off their mortgage, plus a bit over for any other immediate emergencies.

If your mortgage is small, or if the cost of a policy puts you off, think about a lump sum you might need to give yourself the kind of treat you have always dreamed of. For example, a round-the-world cruise.

2. What do you need cover for? There are many different policies, offering cover for a wide range of conditions. In practice, you will be torn between protecting yourself against everything and being more selective.

For example, we have already mentioned Alzheimer’s: but how many people are likely to contract this illness before 55? So if you are 35 years old, why pay more to guard against it?

3. How long do you need the policy for? Most people tend to have it either for the duration of their mortgages or until they retire, in the latter case because it gives them that “world cruise” option.

4. Do you need protection against inflation? You can have automatic updating of payouts – of course, you end up paying more for them.

5. What happens if you die within a few days of diagnosis? Most insurers won’t pay out if you “pop your clogs” between 14 and 28 days of diagnosis.

The easy way round this is to have what was called “accelerated life insurance” – that is, a combination of life and terminal illness cover. Payout happens on diagnosis of a dread disease or death, whichever comes first.

6. Are your other benefits affected? Some state benefits – like the state pension – are not means-tested so you would still be able to claim despite a lump sum payout. But your Pension Credit is affected.

More pages

Page 1: Introduction
Page 2: How are bills charged?

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