Critical Illness Insurance

Critical illness insurance may be very important for you to consider taking out if you have significant ongoing financial commitments, such as mortgage payments to make.

What it does

Critical illness cover is a long-term insurance policy designed to pay a lump sum (or income) upon the diagnosis of certain life-threatening or debilitating (but not fatal) conditions. Some examples of such conditions or illnesses would be: a heart attack; a stroke; certain types / stages of cancer; multiple sclerosis; or loss of limbs.

The illnesses that are covered will be specified in the policy, along with any exclusions and limitations - these will differ between insurers. Critical illness policies usually only pay out once, so they are not a replacement for income. You can use the payout to pay for medical treatment, pay off your mortgage or anything else.

When you might buy it

Many people take out critical illness insurance when they take on a major financial commitment such as a mortgage. This is something that you could discuss with a mortgage adviser. Otherwise, you can buy critical illness cover through a financial adviser (who advises on long-term insurance policies whilst taking into consideration your wider financial circumstances and objectives) or directly from insurance companies.

Key things to think about

Before you take out critical illness cover, you may wish to consider these points:

  • Critical illness insurance pays out if you are diagnosed as suffering from one of the illnesses specified within the policy.
  • Critical illness cover differs to other types of protection insurance such as income protection or payment protection, so make sure you understand what it does and whether it is right for you.
  • Policy summaries often set out a list of illnesses covered however, this may only be a guide and the full details will be listed in the policy document. The policy document will also set out the criteria that have to be met before the insurer will pay a claim.
  • For example, in the case of cancer, not all cancers or stages of cancer are covered. So make sure you check which illnesses are covered.
  • Critical illness insurance does not cover simply any sickness that affects your ability to work - instead it specifies exactly which illnesses are covered.
  • Some insurers exclude all pre-existing medical conditions, but others will decide on the basis of your personal medical history.
  • If the insurer imposes any conditions, perhaps because of your own or family medical history, you should be told what they are before you take out the policy.
  • Before you take out the cover the firm should give you either a policy summary or key features document. This will set out the key features and benefits as well as any significant or unusual exclusions or limitations. If you have any queries about these you should ask the adviser, broker or insurance company to explain the cover in more detail. This will help you make an informed decision on whether to take out the cover.
  • Many insurers now provide a plain English guide to the illnesses covered. Ask if you can have one of these which will explain the policy you are considering.
  • Detailed policy terms and conditions will be provided in the policy document the insurer will send you after you take out the cover - make sure you read this so that you know what you are covered for.

Taking out critical illness insurance

  • It is vital that you provide full and honest answers to questions you are asked about both your own and family medical history. Giving incomplete or wrong information could invalidate your policy and any claim you make on it.
  • If you are not sure, it is better to mention things. Otherwise you will not be aware of what the policy may or may not pay out for until you make a claim.
  • Bear in mind that the initial premium that you are quoted will only be an estimate. The insurer will confirm the actual premium, and the terms, after it has considered your medical history.
  • Make sure you understand exactly what the policy covers, when it will pay out and when it will not.
  • Read the documents you are given and ask questions if you do not understand anything.

Cost

  • Premiums for critical illness insurance are typically cheaper the younger you are, but the cost will also depend on your medical history and that of your close family.
  • Some insurers may offer to reduce the premium if they exclude a pre-existing condition, such as cancer, while some do not offer reduced premiums for exclusions.
  • Some policies will cover more illnesses than others or may offer different benefits, such as waiver of premiums, which may make them more expensive.
  • Some policies may be combined with life cover, which may make the critical illness element cheaper.
  • Some policies may give you the option of reviewable or guaranteed premiums. Guaranteed premiums are more expensive but with these you have the certainty of knowing that your payments will remain level throughout the life of the policy. Reviewable premiums may be lower initially but the cost could rise if, for example, the insurer receives a significant increase in claims.

Changing your mortgage and increasing the cover
If you already have critical illness insurance you should think carefully before you cancel your existing policy and take out a new one.

You might find that by replacing a policy you lose some of the benefits if you have developed any illnesses since you took out the original policy. This is because pre-existing conditions may not be covered under the new policy.

You may be able to get cheaper cover if you switch to another insurance company, but be aware that the new cover might not meet all of your needs. So think very carefully before you replace or switch your policy.

Some policies allow you to increase your cover, often you may wish to consider this after lifestyle changes such as moving house or having children. Ask your insurance company or financial adviser for information about this.

If you cannot increase the cover under your existing policy you could consider taking out an additional policy to 'top up' your existing cover.

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