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What is Critical Illness Insurance?

Critical Illness Insurance provides a lump sum of money should the policyholder be diagnosed with having one of the insurer's specified Critical Illnesses during the term of the policy.

Critical Illness Insurance can be used to provide protection in a number of ways. Like Life Insurance, it was primarily designed to help protect immediate family members and possibly other dependents from financial hardship by providing the means to pay off the mortgage on the family home and/or by providing income for the family to maintain their standard of living.

With the improvements in modern medicine leading to higher recovery rates, particularly for cancer which will affect 1 in 4 men and 1 in 5 women by retirement age, Critical Illness Cover can also be used simply as funding to cover expensive treatments or an extended period of convalescence before the policyholder returns to work.

As the chances of developing a critical illness are far greater than the chance of dying, Critical Illness Cover tends to be 3-4 times more expensive than Life Insurance. Typically, however, a combined policy will work out much cheaper than separate Life Insurance and Critical Illness Policies, so much so that often adding a Life Insurance element to a Critical Illness policy may add no more than a small increase in the monthly premiums, if any.

What Critical Illnesses are covered?

Whilst most common major illnesses are covered by insurers, not all companies cover the same illnesses, so it is important that the policyholder is familiar with the inclusions and exclusions before any documentation is signed. The illnesses usually covered are:

What type of Critical Illness Insurance is required?

If the policy is to be used solely to cover a repayment mortgage, then a decreasing term critical illness product is usually the best choice, as the amount of money the policyholder has been insured for decreases in line with the value of the outstanding mortgage balance.

Conversely, a level term critical illness product is usually the best choice for an interest-only mortgage, where the value of the outstanding mortgage balance remains constant during the term of the policy.

Level term critical illness is also the preferred choice for the other main usage for term life insurance, namely providing family protection until the children leave home, or until the surviving spouse has retired. It is often advisable to consider an index-linked policy in this instance to counteract the effects of inflation on the value calculated to provide sufficient protection for the family. This is also sometimes known as Increasing Term Assurance.

Where you are looking to cover a repayment mortgage AND provide additional family protection, the best option may well be to apply for two policies, one decreasing term to cover the repayment mortgage and one level term to provide the additional family protection. The other option is to simply apply for a level term policy on the basis that over time the policy will be increasingly geared towards the additional family protection element as the value of the outstanding mortgage loan decreases, and at the same time it will cover increases in inflation.

How much Critical Illness Insurance is required?

The amount of cover required is always going to depend on an individual's circumstances. Essentially, you need to work out the financial impact to your family in the event of you becoming critically ill, and how much money they would need to survive until you recover. As a general rule of thumb the best starting point is to multiply your annual net income by 20 and then add the value of your outstanding mortgage or other loans*. If you cannot afford to pay for that amount of cover, you should ideally then set a budget and then find out how much critical illness insurance your budget will buy.

If you preference would be to return to work after recovering from your illness, then you may opt for a lower amount of cover than if you would prefer to keep your options open.

* If you have taken out some form of protection insurance with a loan, then it is possible that this already includes a critical illness element, which means the loan can be ignored for the purposes of this exercise, but it is worth checking.

Further Information

Saligo Bay Financial Services Limited is an Introducer Appointed Representative of Baigrie Davies and Company Limited, which is authorised and regulated by the Financial Services Authority. FSA Register number: 225058.

QuoteLifeCover is a trading name of Saligo Bay Financial Services Ltd.