What is critical illness cover?

Critical illness cover is a type of long-term insurance policy that provides a lump sum payment if you receive a diagnosis of a serious illness like cancer, stroke, or heart attack while the policy is in effect. The specific definition of critical illness varies depending on the insurance company offering the cover, but as discussed in the following section, there are several conditions that are commonly included in most critical illness insurance policies. It is important to distinguish critical illness cover from terminal illness benefit, which is typically a standard feature of life insurance. One key aspect to bear in mind is that a critical illness policy will pay out upon diagnosis, regardless of whether you eventually recover fully.

While critical illness cover is an essential component of a family's financial protection strategy, it should not be seen as a substitute for life insurance and is often provided as an additional option to complement life insurance coverage.

What does critical illness insurance cover?

Critical illness insurance will pay out a tax-free lump sum if the policyholder is diagnosed with one of the critical illnesses listed in the policy document. The specific medical conditions and severity of conditions that critical illness insurance covers may vary from one insurance provider to the next.

The following are some of the critical illnesses covered by the majority of insurance providers:

• Cancer – excluding less advanced cases

• Heart attack

• Stroke

• Kidney failure

• Liver failure

• Major organ transplant

• Cardiac arrest

• Traumatic brain injury

• Motor neurone disease – resulting in permanent symptoms

As you would perhaps expect, cancer, heart attack and stroke make up the vast majority of claims and the Association of British Insurers (ABI) released a guide in order to set out a minimum definition for each of the three core conditions (as well as 21 others). In the past, it has been difficult to compare like-for-like policies as each insurer may have a different definition, so it is good to see that the industry is taking steps to assist consumers in understanding and comparing critical illness policies.

Do you really need critical illness cover?

If you were diagnosed with a critical illness your life may never be the same again. Apart from the emotional strain for you and your family you will probably have to deal with financial stress as well.

• Will you still be able to work and earn an income?

• Will you incur travel expenses to receive treatment?

• Will you have to make alterations to your home due to your illness?

• Will you have to employ people to help you do the things that you are no longer able to do?

Having a lump sum of money from a critical illness cover policy will help with this expenditure while you take time off work and focus on your treatment and recovery. If you can afford critical illness cover I would always recommend that you consider it. If you can't then you should make sure you have life cover in place first and foremost and then consider income protection insurance which can provide a replacement income if you are unable to work due to incapacity.

Working out the amount of critical illness cover you need?

The amount of critical illness cover you will need will depend upon your financial commitments, current debts and other monthly expenses. Here are a few areas you need to consider in order to work out how much critical illness insurance you need:

• How much mortgage is outstanding?

• How much money is needed to meet your rent or mortgage payments each month?

• Have you any other debts?

• Estimate potential medical expenses (e.g. care home, car adaptations)

• Amount needed to pay for your household bills and essentials

• Less savings and other assets

• Less any state benefits you currently receive or may receive in the future

• Less any unearned income such as rental income or sick pay from your employer

Once you have calculated the above you will have a fairly clear idea of what sort of lump sum you will require for you or your family to continue your current lifestyle if you were diagnosed with a critical illness. Broadly speaking a good starting point is to aim for an amount of cover that will provide a lump sum that is equivalent to your level of life cover. However, that may prove expensive so you can then reduce the level of critical illness cover so that it is affordable (see the case study below). Some critical illness cover is better than none at all and will lessen the financial impact of a serious illness. Also, think about how you and your family would cope if your partner developed a critical illness. Don't just focus on yourself, consider a joint critical illness policy with your spouse and even your children.