Critical illness insurance provides you with a tax-free lump sum if you’re diagnosed with certain illnesses or injuries. There are many factors to consider when choosing a policy, from the number of conditions covered to whether the sum assured should increase in line with inflation.
Critical illness insurance pays out a tax-free lump sum should you be diagnosed with certain illnesses or disabilities (although some policies give you the option to receive regular income payments instead via family income cover). The payment could offer reassurance that you would potentially be covered for any additional costs incurred due to a serious illness.
This type of insurance can be contrasted with income protection insurance, which provides an income if you’re unable to work but doesn’t pay a lump sum. It can also be contrasted with life insurance, which only pays out on death. If you have income protection insurance and life insurance, but lack critical illness cover, you may find it hard to pay for domestic changes or one-off medical bills resulting from a serious illness.
Our Should I take out critical illness cover? article can help you decide whether this type of insurance might be right for you. If you are considering taking out a policy, then you’ll have to decide which one best suits your needs, as there can be significant differences between them. You will also have to decide how to set the policy up, as each one features a number of options.
One thing to note: many people taking out a mortgage may be offered a critical illness policy run by their mortgage lender. But cheaper, more suitable, policies may be found elsewhere, so benefits could be gained from investigating alternatives before signing up.
In general terms, the greater the cover a critical illness policy offers, the higher the premiums you have to pay. So premiums would be relatively high for a policy with a potential lump sum payout that rises in line with inflation and that covers 50 conditions. But premiums would be relatively low for a policy with a potential lump sum payout that stays fixed throughout the term, that covers 30 conditions and excludes any you already have.
You may want to steer clear of policies with lots of features you don’t need, as you would be paying for unnecessary cover. Equally, you may be willing to pay higher premiums for features you do want.
And if you can’t get your desired level of cover for an affordable premium, then you might want to think about reducing the potential lump sum payout on the policy. Premiums are lower for smaller lump sums.
The number and type of conditions covered varies between policies, but, as a minimum, they should include cancer, heart attack, stroke and dementia (including Alzheimer’s). You can find a fuller list of potential insured illnesses in our What is critical illness insurance? article.
The more comprehensive policies will include around 50 conditions. You will need to ensure you are comfortable with the range of illnesses covered by a policy. You also need to consider the varying definitions of illnesses adopted by insurers. If you find all this rather daunting, then you could benefit from getting the help of a financial adviser, who can guide you through all the variations.
When it comes to selecting a policy, you may want to consider the following points:
And when considering a policy, you might want to ponder the following question. How would you feel if you took out a less comprehensive policy only to undergo an illness or injury that wasn’t included in your policy but was included in others?
Another consideration is a policy’s coverage of pre-existing conditions, referring to illnesses you have already had. Most insurers won’t cover these and those insurers that will cover pre-existing conditions may charge higher premiums for doing so. Moreover, some policies won’t include certain illnesses your family members have had before.
You also need to decide whether to opt for a reviewable or a guaranteed premium. A guaranteed premium will remain constant throughout the life of the policy. But a reviewable premium is generally reviewed after a certain period of time, usually every five years, and will probably increase after each review. Guaranteed premiums can cost more in the near term, but may be the best option if you want the security of knowing what you’ll pay in future.
A further consideration is whether to add a ‘waiver of premium’ to your policy. This would mean your monthly premiums would automatically be covered if you could no longer work due to an illness or injury that lies outside of the policy. Waiver of premium can provide additional security, but it generally begins only after you’ve been off work for at least six months, and it does raise the cost of your premiums.
You may also need to decide whether to take critical illness cover as a standalone policy for yourself alone, or as joint cover, perhaps for your spouse or partner. Joint policies only offer one potential payout, after which the joint policy ends and the second policyholder loses the protection. But they are often cheaper than two standalone policies.
Critical illness cover is often sold bundled into a life insurance policy. But, with combined policies, if you receive a payout for undergoing a serious illness, then the amount that could be paid out if you later die within the policy term will be reduced. Separate critical illness cover and life insurance policies avoid this but can be a more expensive option.
There are two types of combined life and critical illness insurance:
Other features you might want to consider include:
Guaranteed insurability
This means that, on the occasion of special events (such as buying a new house, increasing a mortgage or having children), you can increase the sum assured without submitting new medical evidence. Guaranteed insurability could potentially help limit increases in premiums.
Sum assured to increase with inflation or average earnings
There are clear benefits to having a lump sum that increases in line with rising prices or wages. For example, inflation would erode the buying power of the lump sum, potentially leaving you less well off than you expected.
Coverage of children
Some policies will cover your children, though cover levels are typically half the sum insured on your own policy. Cover for children could be particularly important to young families. It could potentially ensure the policyholder receives a lump sum to support their family at a time when parents face additional responsibilities and may be unable to continue work. On the other hand, people without children may consider they would be paying for a feature of no benefit to them.
Automatic upgrade
Some policies allow cover to be automatically upgraded for existing policyholders as new contracts are improved.
Temporary free cover
The provision of free cover during the underwriting process could potentially benefit everyone.
Adaptability
Does the policy adapt in line with medical developments, so newly discovered illnesses can be included? If it does, then your cover would increase in line with medical advances.
Innovation
Does the insurer have a record of introducing new ideas to critical illness policies? If so, this could give greater assurance that you’re in good hands when it comes to cover for a serious illness.
There’s plenty to consider when it comes to choosing a critical illness policy. A financial adviser can guide you through the various options and help select a policy that’s right for your circumstances.
At Lloyds Wealth, one of our principles is to have regular reviews with an adviser. This can help ensure you remain as protected as possible, taking into account your individual circumstances.
This article is for information purposes only. It is not intended as investment advice.
Fees and charges apply at Lloyds Wealth.
Any views expressed are our in-house views as at the time of publishing.
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In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing but can give no assurance or warranty regarding the accuracy, currency or applicability of any of the contents in relation to specific situations and particular circumstances.
Protection policies have no cash-in value at any time. If you don't pay your premiums on time your cover will stop, your benefits will end, and you'll get nothing back. If the benefit amount has not been paid out by the end of the selected term, the policy will end and you'll get nothing back.
