You may have come across the term ‘critical illness’ when researching mortgages or mortgage related life cover.
Critical illness insurance can provide a cash lump sum payment, should you be diagnosed with a severe illness or medical condition. The payment is tax free and can be spent in any way you like.
Read on to learn some more, as we explain how critical illness insurance works, what illnesses are covered and who might need this type of cover.
What is critical illness cover?
Critical Illness (CI) cover is a type of insurance policy that pays out a tax-free lump sum if you suffer from one of a list of serious illnesses.
These will include; cancer, heart attack and stroke.
You may also be covered if you become permanently disabled.
CI policies make the cash payment to you, while you are still alive.
You can buy critical illness insurance by itself (standalone), or alongside life cover.
The style of policies are very similar to those available for life cover, the term based ones are the most popular. And once a claim has been paid out, the policy then stops.
How does critical illness insurance work?
Critical illness cover can be purchased as a standalone policy but most people choose a policy that has critical illness cover and life cover combined.
This is often taken out to protect a new mortgage and the policy can last for the same duration as the mortgage term
The sum assured can be set up on a level, or decreasing basis. This means the policy can be used for a repayment mortgage or an interest only mortgage.
You are also able to have the policy in just one name, or joint names.
When you buy a CI policy you will need to inform the insurance company about your medical history, your occupation and any high risk hobbies.
You will receive the sum assured as a tax-free lump sum if you’re medically diagnosed with one of the illnesses or conditions listed in your policy.
DID YOU KNOW?
When the first critical illness product was launched in 1983 it was called “dread disease insurance”.
No wonder they changed the name!
How is it different to life insurance?
Critical illness is different to life insurance because the policy benefit is paid to you, while you are still alive.
When can you make a claim?
LIFE INSURANCE – Your family can only claim once the life assured (you) has died.
CRITICAL ILLNESS – You can claim if you have experienced one of the specified illnesses.
So life insurance is used to provide for your family after your death.
The type and level of cover needed will depend on each persons situation. But typically, most people will want their mortgage paid off, at the very least, so their family can afford to stay in their home.
While critical illness cover is designed to give you some financial support while you recover from a serious illness, which often means having to stop work for a period of time. Depending on the illness, it is not always necessary for you to be unable to work to claim under the policy. Having the illness is what matters.
What illnesses are covered?
Critical illness cover provides financial protection against a broad range of serious illnesses and conditions.
But it’s important to understand that these policies don’t include all illnesses.
Also, the level and scope of cover will differ between insurance providers.
That said, let’s take a look at the scope of critical illness insurance policies.
The three conditions that must be covered by all “critical illness insurance” products are cancer, heart attack and stroke. Many insurers also cover a wide range of other conditions, such as Parkinson’s disease, kidney failure and major organ transplant.
These are the illnesses or conditions that may be included under a critical illness policy.
| Condition | Description |
|---|---|
| Alzheimer’s disease | A progressive brain disorder causing memory loss and cognitive decline. |
| Aorta graft surgery | Surgery to replace a section of the aorta with a graft. |
| Benign brain tumour | A non-cancerous growth in the brain. |
| Blindness | Permanent and irreversible loss of sight. |
| Cancer | Malignant tumour, leukaemia, or lymphoma. |
| Cardiac arrest | Sudden and unexpected loss of heart function. |
| Cardiomyopathy | A disease of the heart muscle affecting its function. |
| Coma | A prolonged state of unconsciousness. |
| Coronary artery by-pass grafts | Surgery to bypass blocked coronary arteries. |
| Creutzfeldt-Jakob disease | A rare and severe brain disorder. |
| Deafness | Permanent and irreversible loss of hearing. |
| Dementia | Progressive decline in cognitive function. |
| Encephalitis | Inflammation of the brain. |
| Heart attack | Death of heart muscle due to insufficient blood supply. |
| Heart valve replacement or repair | Surgery to replace or repair heart valves. |
| HIV infection | Contracting HIV from a specific event. |
| Kidney failure | Chronic and end-stage failure of both kidneys. |
| Liver failure | End-stage liver failure. |
| Loss of hand or foot | Permanent physical severance of a hand or foot. |
| Loss of speech | Total and irreversible loss of the ability to speak. |
| Major organ transplant | Receiving a transplant of a major organ. |
| Motor neurone disease | A progressive neurological disease. |
| Multiple sclerosis | A disease affecting the central nervous system. |
| Parkinson’s disease | A progressive neurological condition. |
| Pulmonary artery surgery | Surgery to remove a blockage in the pulmonary artery. |
| Respiratory failure | End-stage lung disease. |
| Stroke | Death of brain tissue due to insufficient blood supply. |
| Systemic lupus erythematosus | A chronic inflammatory disease. |
| Third-degree burns | Burns covering at least 20% of the body’s surface area. |
| Traumatic brain injury | Injury to the brain from an external force. |
List provided by the ABI: Updates to the ABI’s Guide to Minimum Standards for Critical Illness cover
Who needs critical illness cover?
Critical illness insurance is a valuable consideration, especially if you’re a homeowner or responsible for your family’s financial stability. It’s not just about being prepared for the unexpected; it’s about securing your future and that of your loved ones.
Although you may be entitled to receive some state benefits, they are not normally sufficient to maintain your standard of living.
Having some critical illness cover will give you a financial cushion, and provide you with some breathing space.
Advances in medical treatments mean that most people are back on their feet within a few months. However, there will always be some that are affected for the rest of their lives, and may never be able to work again.
Homeowners with Mortgages
If you’re a homeowner with a mortgage, critical illness cover can be a crucial safety net. It ensures that you won’t have to worry about mortgage payments while dealing with medical expenses and lifestyle adjustments.
Income Protection
For you, having a source of income is vital. Critical illness can replace lost income if you’re unable to work due to a covered illness. This financial support can help maintain your lifestyle and cover daily expenses.
Medical Costs
Dealing with a serious illness often comes with substantial medical costs, even with the NHS in the UK. With this cover, you can afford the best treatments, specialist consultations, and medications without draining your savings.
Debt Repayment
If you have outstanding debts, like personal loans or credit cards, critical illness cover can be a lifeline. The payout can be used to clear these debts, preventing financial strain during your recovery.
Peace of Mind
You value peace of mind, knowing that you and your family are financially secure in the face of a health crisis. Critical illness cover offers that security, allowing you to focus on your health and recovery.
There are 1.4m survivors of heart attacks in the UK.
There are 1.3m stroke survivors in the UK.
1 in 2 will develop some form of cancer in their lifetime.
The most common CI claims are for cancer.
How much cover do you need?
There’s no set amount of cover, or calculation, that’s right for everyone.
How much you need will depend on your own situation.
It’s a good idea to think about the costs you would need to cover if you fell ill and couldn’t work.
If you have children, then you’ll want to ensure that your family is provided for, in case you can’t work due to ill health, or were hospitalised for extended periods of time.
People with mortgages often choose to insure for the amount that they owe, giving them the opportunity to just pay off the mortgage should something happen. You would probably choose decreasing cover for this.
Or perhaps get a policy which pays you one or two years of earnings, enabling you to spend time recuperating, not worrying about how to pay the bills.
A financial adviser will be able to help you with these calculations.
What affects the monthly cost?
The cost of Critical Illness (CI) cover, often referred to as the premium, can be influenced by several factors. Here’s a breakdown of the main ones that can affect the monthly cost of CI cover.
- Age: Typically, the younger you are when you take out the policy, the lower the premium. As age increases, the risk of developing a critical illness also increases, leading to higher premiums.
- Health and Medical History: If you have a history of certain medical conditions or a family history of critical illnesses, this can increase your premium. Smokers or those with high cholesterol or blood pressure might also face higher premiums.
- Lifestyle: Engaging in high-risk activities or having a hazardous occupation can affect the cost. For instance, a skydiving instructor would pay more than an office worker.
- Amount of Cover: The higher the payout you want in the event of a diagnosis, the more you’ll pay in premiums.
- Length of Policy: Policies that offer protection for a longer duration would be more expensive than shorter-term policies.
- Type of Policy: Some policies offer level premiums (they stay the same throughout the policy term), while others might increase over time.
- Cover Details: Policies that cover a broader range of illnesses or conditions might be more expensive than those covering more limited illnesses.
- Additional Benefits: Some policies offer additional benefits, such as child cover, or the option to increase cover after certain life events without further medical evidence. These can affect the cost.
Good to know before you apply
Understanding, and claiming, under a CI policy can sometimes be confusing.
Here’s a heads up on what to look out for before you apply for a policy.
LEVEL OF COVER
Have a think about the level of cover needed. This does affect the premium but its purpose is to provide you with some cash when you need it most.
WHAT’S COVERED
The devils in the detail. There’s lots of small print for critical illness cover. Make sure you read through the documents and familiarise yourself with what is, and is not, covered.
PRE-EXISTING CONDITIONS
You may find that certain pre-existing conditions (that you already have) are excluded from the policy. Or sometimes insurers will cover you but for an increased/loaded premium.
SHOP AROUND
Insurance is a competitive marketplace and there’s lots of companies vying for business. Shop around and use an independent adviser to find the best policy for you.
THERE’S PROBABLY NO DEATH COVER
Standalone CI policies are there to pay you a sum of money while you are alive and living with a severe disease or illness. If you die there’s unlikely to be any money paid out.
No. The payments from a critical illness insurance policy are not taxable and you can use the money any way you like. Remember that if the policy includes life cover, then this will stop if you have a CI claim.
Yes, your premiums are fixed and guaranteed to stay the same unless you alter your policy.
It’s fair to say that critical illness cover is more expensive than life insurance. The main reason is that you are more likely to suffer an illness and claim.
Yes, decreasing cover policies are available should you wish to protect a repayment mortgage.
For the critical illness part of a policy, insurers need you to survive for 10/14 days beyond a confirmed diagnosis, before they pay out the policy benefit. Specific details will be included within the policy summary.
Critical illness term plans have a fixed term. When this ends, the policy and all associated cover, will stop. It will not have a cash value.
Most insurers do now include terminal illness insurance as a standard feature of policies. However, if this is important to you, you should check the policy cover before making an application.
Life cover provides an important financial safety net for your family should you pass away. But if you don’t die and are unable to work, or have to work less, then your family may face some financial difficulty.
No. Private medical insurance (think BUPA) is not included under a critical illness policy, and the two provide very different types of cover.
Yes they do. According to the ABI, in 2022 insurers paid out over £1bn just in critical illness claims. This is an average payment of over £60,000 per person.
