Critical illness, critical cover?

Critical illness cover provides a one-off, tax-free lump sum on diagnosis of a dread disease, as defined by the insurer. It works like "life insurance in advance", making the payout when you fall ill rather than when you die.

According to industry statistics, one in four men and one in five women will contract such a disease before they reach the age of 65, and one in three people will be diagnosed with cancer during their lifetime.

Time was when anyone who needed life insurance took out some sort of policy that paid out when they died - to pay off the mortgage, for instance, in order to avoid the possibility of a dependent spouse and children losing their home in the event of the death of the family breadwinner.

However, with the increased longevity that comes from better nutrition and medical advances, the mortality rate among younger individuals has plummeted, and you have more than twice as much chance of contracting a dread disease, such as heart problems or cancer, during your working years than you have of dying.

If, fortuitously, you get better you get to keep the money, and because you get the money while you are still alive, you can spend it as you wish - perhaps on treatment not available on the health service, on a round-the-world cruise to brighten your last days, or to make alterations to your home, such as wheelchair access, or simply to support yourself if you have no other income.

This is not 'medical insurance'

Critical illness insurance should not be confused with private medical insurance, which pays for the cost of private medical treatment; or income protection insurance, which pays you a monthly income after you have been unfit to work for an agreed period although you can, of course, use the money from a critical illness policy to pay for treatment, or to supplement your income if you wish.

Critical illness cover is a particularly good alternative to regular term assurance if you are single with no dependants. In this case, term assurance could be a waste of money, as the chances are you are not bothered about paying the bills once you are dead, as once you have shuffled off this mortal coil your house could be sold to repay the mortgage and other debts and no one's going to be made homeless. What would be scary for a single person would be to contract a disease so serious that you could not work, and with no other family member to support you, or to require modifications to your home and have no money to make them.

So what would you be covered for with a critical illness policy? Different policies cover different diseases, and when you are choosing a policy, you should ensure that it meets your needs, but most will cover a "core" number of major illnesses.

The core diseases that feature in most policies are cancer, coronary artery by-pass surgery, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. You may also be able to insure yourself against aorta graft surgery, benign brain tumour, blindness, coma, deafness, heart valve replacement or repair, loss of limbs, loss of speech, motor neurone disease, paralysis/paraplegia, Parkinson's disease, terminal illness and third degree burns. But you should be careful of policy definitions as - for instance - not all cancers will be covered.

Why critical illness cover costs more

If insuring yourself against serious illness looks like a good idea, what's the catch? First, critical illness cover can be expensive compared with straight life insurance. But that is because you are more likely to suffer a critical illness than you are to die. Second, it has to be said, some of the insurers seem to have a reputation for finding any excuse for not paying out.

You must be very careful with definitions - making sure you have the right level of cover - and declare to the insurer anything that they might consider a pre-existing condition, non-declaration of which might give them a reason to void the policy. An independent financial adviser can help you to choose the right policy.

One of the huge pitfalls with critical illness insurance is cancer diagnosis, as many cancers - for example, skin cancers other than invasive malignant melanoma - are not usually covered, even though you might need lengthy or unpleasant treatment and time off work.

The situation with definitions of illnesses used to be much worse, but last year the Association of British Insurers published model definitions as a minimum standard for the most common critical illnesses covered. This means that insurance companies will assess claims for all these conditions using the same or more favourable terms.

So what kinds of policy are available? There are many different types on the market, including cover for couples and families, and fixed-term and whole of life cover. For instance, you might want cover for a set period of time, such as during the years when you have a mortgage, or you might want permanent cover which you can keep paying premiums on for as long as you need it. Check whether premiums will rise during the period of cover, or if you are required to tell the insurer if you change your job.

One thing to consider is cover "bundled" with life insurance. This might suit you, particularly as it is likely to be cheaper. But do remember that such a policy will usually only pay out once - on diagnosis of illness or death - so if you survive a serious illness you could find yourself with no life cover and unable to get affordable insurance elsewhere - or indeed at all. If you can afford it, it might be worth considering separate life and critical illness policies.

28 June 2005 © Moneyextra.com

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