An Guide to Critical Illness Cover

Critical Illness Insurance (CIC) is designed to pay out a (tax-free) lump sum in the event of you suffering from a serious illness or if you have to undergo certain types of surgery.

The lump sum is to help with the extra costs of living with a particular condition but it's important to note that it only pays out if you contract one of a defined list of illnesses. In other words, if your illness isn't on the list, you won't get a penny.

About 90% of all critical illness claims are for cancer, coronary artery bypass surgery, heart attack, kidney failure, organ transplants and stroke and these core illnesses are usually on the list. If you want others to be added, you'll pay more.

Unless you have substantial savings (or other sources of income), some form of critical illness insurance may well make sense for you. How much you should have depends on your circumstances. Consider the lump sums that you might need to make in the event of contracting a serious illness -- being able to pay off the mortgage, for example, or to make modifications to your home. If you would be able to cover the necessary lump sums from your own or your partner's savings, then critical illness insurance may well be unnecessary and it may be more appropriate to concentrate on income protection.

Assuming you do need critical illness cover, you'll not be surprised to hear that there is a wide range of policies available. The size of your premium will depend on your age, gender, health, occupation, whether or not you smoke, the type of cover you need, and how long you need it for.

Joint Cover

It is possible to chose between policies which cover just one person and policies which cover two spouses - known as joint life cover.

If you are interested in joint life cover, read the small print. Most joint life policies will only pay out when the first policyholder becomes critically ill. If the second policyholder then becomes critically ill, the policy will have paid out and expired, leaving the second person unprotected. If you want cover for one of you, then you probably want it for each of you so two single life policies are often a better option.

Combined Policies

Often you will find critical illness policies which are bundled in with a life insurance policy. There is nothing necessarily wrong with this. However, if you go for one of these, make sure that it covers exactly what you want it to.

You might find that a bundled product is cheaper than two individual ones but it might mean that the bundled policy only pays out once. So, if you contracted a serious illness and then died several months later, you (or rather your dependants) would find that a bundled policy, having paid out for the illness, does not pay out on your death. If you have used the lump sum to cover medical costs and alter the home after the critical illness, there will be no money on your death to repay the mortgage or provide your spouse with an income. Separate policies would, of course, pay out for both and are therefore preferable - if affordable!

Total and Permanent Disability

Many policies will also include cover for "total and permanent disability". This pays out if you become unable to work due to permanent disability arising from any illness or injury (regardless of whether it is listed in the policy) .

Whether or not it is a good idea to include one of these clauses is debatable. Effectively it overlaps with income protection insurance (IP). However there are small differences. First of all, critical illness insurance pays out a lump sum whereas IP pays an income. Would you rather pay off your mortgage or be given the income to pay the premiums? Probably the former. However, IP has one big advantage. It pays out for as long as you're off work (after a brief initial deferred period). You don't need to be permanently disabled, just unable to work. It is therefore possible that IP will match your requirements better than a total and permanent disability clause in a CIC policy.

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