What is Critical Illness Cover and should you have it?

What is Critical Illness Cover and should you have it

An article about insurance will never make the most riveting of reads, but, this one might make the difference between you keeping the home you love and having to sell it.

Discussing illness, death and insurance can also be rather depressing; but, it’s important, so please bear with us.

What is it?

Simply put, Critical Illness Cover pays out a lump sum if you are diagnosed with an illness covered by the policy. You will also need to survive for a minimum period, usually 10 days. If you are unfortunate enough to die quickly from the illness then your Life Cover would pay out.

The lump sum paid out is tax-free and can be used for any purpose you wish. Although it is often used to repay a mortgage, more of which in a moment.

Critical Illness Cover can be taken out as a standalone policy, or more usually, in conjunction with Life Cover. So, if you are seriously ill, the Critical Illness Cover pays out, if you die, the Life Cover does.

The illnesses covered differ from insurer to insurer, the most common which are claimed on include:

  • Cancer
  • Heart attack
  • Stroke
  • Multiple sclerosis
  • Parkinson’s disease
  • Benign brain tumour

However, the most comprehensive policies cover over 50 conditions.

How does Critical Illness Cover differ from Life Cover?

Life Cover is easy to understand; it pays out if you die or have a terminal illness with a relatively short period of time to live.

Critical Illness Cover, however, pays out on diagnosis of an illness covered by the policy. If you then go on to recover, or live for many years managing the condition, the insurer won’t reclaim the money they have paid to you.

Critical Illness Cover to protect your mortgage

Critical Illness Cover is most commonly bought, in conjunction with Life Cover, to protect your mortgage.

For example, let’s say you and your partner borrow £250,000, on a Capital Repayment basis (which means the amount you owe decreases over time) over 20 years to buy your new home. You may well therefore take out a Decreasing Term Assurance (DTA) policy, so that the amount paid out mirrors what you owe on the mortgage. You can select whether the lump sum is paid out only when a critical illness is diagnosed, or should you die too. It is usually the case that adding Life Cover to a Critical Illness policy makes very little, if any, difference to the premium.

If you have an Interest Only mortgage, where the balance remains level, you would probably use a Level Term Assurance policy so that the lump sum paid out remains constant.

This is of course very detailed stuff and your adviser will be able to recommend the right type of policy, the sum assured you need and also the right insurer.

Choosing a Critical Illness Cover policy

The temptation is often to simply go for the cheapest; that could be a mistake.

The range of illnesses covered, and how they are defined, should be more significant factors when choosing an insurer than cost alone.

Let’s compare two insurers. Zurich currently covers 75 different illnesses, whereas Legal & General insure just 42 (Source: LV=). It’s important to check the definition of each illness too, as well as other policy terms and conditions.

It might also be important that you are covered for certain, specific, illnesses too.

Once you, or your adviser, has narrowed down the choice based on the quality of cover, then you can start to look at price.

There’s no denying that choosing a Critical Illness Cover provider is complex. That’s where we come in, to help, guide and ultimately recommend the right insurer for you.

Does it always pay out?

The personal finance press is full of stories of Critical Illness policies not paying out. Bad news sells!

However, the reality is very different.

Most of the major insurers publish their claims histories, so we can see what percentage of claims have been paid and why a small number were declined.

In 2016 Zurich, who we mentioned previously, paid 92% of all Critical Illness claims; a total of £65.4 million. The main claims were paid for:

  • Cancer (55%), including a third of these for breast cancer
  • Heart attacks (13%)
  • Strokes (7%)

So why were the 8% declined?

The main reason was that the definition of the illness was not met. For example, someone claiming for a heart attack when actually they had something else wrong with them. There were also a small number of claims declined because relevant medical information, such as ongoing tests or investigations were not disclosed when the policy was taken out.

The story is similar at Legal & General where 92.56% of Critical Illness claims made in 2016 were paid out. Of the 7.44% which were rejected, 2.6% were turned down due to “misrepresentation” and 4.8% because the claim didn’t meet the definition of the illness.

The lessons?

In the majority of cases claims on Critical Illness policies are paid.

You can reduce the chance of it not paying out by making sure you understand the policy and what you are covered, while ensuring that you are as honest as possible when making the application; disclosing everything possible, even if you feel that it isn’t relevant.

“We’ll move in then sort the insurance out.”

Receiving a diagnosis of a life-threatening illness will change your life forever.

Being financially prepared, so that you and your family can remain in the home you love, without the worry of how to pay the mortgage, will give you one less thing to worry about.

But you have to plan for these events, even if they may never happen.

We’ve lost count of the number of times we’ve heard people tell us they will sort the insurances after they have moved in to their new home. Do they get round to it? You can guess the answer in the majority of cases!

We don’t blame them, we are all busy people and ‘life’ takes over. But, ‘life’ has a nasty habit of throwing the odd curve ball at us, the most serious being an unexpected cancer diagnosis, heart attack or stroke.

Call us on 0207 808 4120, or click here to complete our online enquiry form, and we’ll help you prepare for anything life can throw at you.