Critical illness cover: Is it critical?

We don’t like to think about becoming seriously ill, but it’s important to consider financial protection against the worst happening.

Critical illness cover is one option, designed to ease the financial burden with a tax-free lump sum which you can spend however you like. However, with sneaky exclusions and an array of policies to choose from, getting it right can be tricky.

• What is it?
• What does it cover?
• What isn’t covered?
• How do you buy CIC?
• How can you get the best deal?
• Do you need it? What are the alternatives?
• Compare critical illness cover here

What is it?

Critical illness cover (CIC) is commonly taken out with life assurance as it is usually a relatively cheap addition. It pays out a tax-free lump sum for life-threatening conditions, which are specified in the policy.

This is different from life assurance because while life insurance pays out if you die, CIC pays out if you are alive, but seriously ill. In a way, this is one of the most pessimistic forms of protection, but it can be a huge relief not to have to worry about money should you be struck down with a long-term disease.

A lot of people are unable to work for long periods – 2.6 million in the UK currently claim State incapacity benefit, or employment and support allowance – and CIC will give you reassurance in these circumstances, if you can afford it.

Happily, hundreds and thousands of workers receive critical illness cover as part of their employment package, so they don’t have to pay out of their own pocket and the decision of whether to do so has been made for them.

What does it cover?

All CIC policies will cover advanced cancer, heart attacks and stroke. Most will also cover coronary bypass surgery, major organ transplants, kidney failure and multiple sclerosis.

If you become permanently disabled following an injury or accident some insurers automatically offer total permanent disability cover in critical illness insurance policies, while others offer it as an optional cover.

Policies will also automatically cover children (usually from one month to 18 years of age) but payouts are usually capped at around £25,000, pre-existing conditions are not covered and only one claim is permitted per child.

What isn’t covered?

Anything that is not specified in the policy document will NOT be covered.

The problem with CIC is that it’s not always clear exactly what is covered and what isn’t covered. And, the range of conditions and illnesses included will vary widely from one provider to the next.

Complex medical definitions can be a minefield, for example, many policies exclude ‘early stage cancer’ from cover, but many insurers will even consider cancer to be at this stage if a lumpectomy or mastectomy is required. For heart attacks, insurers will insist on medical evidence to ascertain the severity before paying a claim. Traditional policies may also refuse to cover prostate cancer if it’s caught early and hasn’t spread.

The good news is that the industry is working to make things easier. Recently, the Association of British Insurers (ABI) has updated CIC guidelines which insurers have until December 2012 to implement. These are designed to reduce the number of claims declined and make the cover easier to understand with regards to the following areas:

• Total and permanent disability
• Exclusions relating to children’s pre-existing medical conditions
• Revised definitions for cancer, Parkinson’s disease and terminal illness

How do you buy CIC?

You can buy a policy directly from the insurer – leading names include Axa, Aviva, Bupa and Legal & General – but because there is so much variation in terms of the level of cover available, it’s best to buy CIC through an independent financial adviser (IFA) or specialist broker.

An IFA or broker can help you compare policies carefully, pick the right type of policy and explain any exclusions. Remember, it is absolutely vital to be honest when you fill in details about your medical history – if you don’t give full and truthful answers the insurer can refuse to pay out if you make a subsequent claim.

How do you get the best deal?

As with life insurance, family medical history, lifestyle habits (such as smoking and drinking) and age will affect the premium level.

Some people may not be covered for certain conditions or will have to pay considerably more. Smokers, for example, can expect to pay around double what a non-smoker would pay. So take these things into account when setting a budget.

Shop around as ever because there are lots of different types of policies and different premiums you could pay:

• Compare critical illness cover here

You can choose ‘level’ payouts during the policy term (i.e. you get a lump sum pay-out if you become ill at any time while the policy runs), but it is possible to buy cover where the lump sum gets smaller over the 5 years which is cheaper. This type of reducing CIC is designed to be used with decreasing home mortgage repayments.  Less and less cover is needed as the mortgage gets paid off.

Some policies also offer reviewable or guaranteed premiums – with the latter being more expensive, but payments will stay the same throughout, whilst reviewable premiums start off lower, but could rise in the future.

Some insurers such as Bupa, Fortis and LV= may also offer you the chance to reduce your premiums by excluding a specific condition such as cancer. Finally, don’t forget to check with your employer to see if they offer access to free or discounted critical illness or income protection policies.

Do you need it? What are the alternatives?

Critical illness cover is essentially a luxury and most people never even consider it nor miss it. If you can afford the monthly commitment, it might be worth considering this type of cover for a few key years, for peace of mind alone.

However we think income protection insurance is a more flexible choice for most people.

• This cover replaces your income (it pays out up to 75% of your gross monthly salary) so that you can cover any bills and maintain your standard of living if you are unable to work due to illness or disability.
• It gives a tax free payment of so much a month, rather than a lump sum, if you cannot earn due to long term sickness, accident, or injury.
• Income protection kicks in if, for example, you suffered from severe back trouble, or stress, and couldn’t work for several months. Critical illness would not cover this as back trouble is not an illness.
• Payments usually continue until you get back to work, or retire.
• Choose from ‘own occupation’ which pays out until you get back to your specific job, or the ‘any occupation’ for cover if you are unable to do any job.
• The longer the deferral period – the time before the payouts kick in once you’ve been forced to leave work – the less you pay.
• Now read our guide to income protection.