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What is Critical Illness Cover?

Critical Illness Cover 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 Cover 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:

• Alzheimer's Disease before age 65
• Angioplasty
• Aorta graft surgery
• Benign brain tumour
• Blindness
• Cancer (most malignant types)
• Coma
• Coronary bypass surgery
• Deafness
• Heart attack
• Heart valve replacement or repair
• HIV/AIDs (named groups only)
• Kidney failure
• Loss of limbs
• Loss of speech
• Major organ transplant
• Motor neurone disease before age 65
• Multiple sclerosis
• Paralysis/paraplegia
• Parkinson's disease before age 65
• Permanent Total Disability (PTD) before age 65
• Pre-senile dementia before age 65
• Stroke
• Third degree burns

What type of Critical Illness Cover 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 Cover 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.

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