What is critical illness insurance and do I need it?
Knowing that you’ll be financially covered in the event of becoming seriously injured or ill can bring great peace of mind. Critical illness insurance can help with exactly that - and is especially useful at key change points in your life, such as when moving home.
With so much uncertainty in our lives, knowing that you’ll be financially covered in the event of becoming seriously injured or ill can bring great peace of mind. This is where critical illness insurance can be of benefit - it helps with exactly that.
What is critical illness insurance?
Critical illness insurance is a policy which covers you if you become critically ill at any point during your policy term. It’s typically paid to you in a lump sum which is free of tax, and it can be used in whichever way you choose. In most cases, this lump sum goes towards healthcare costs, regular expenditures such as mortgage payments, and also towards any loss of income you may face during your recovery process. The most common claims are for illnesses such as cancer, heart attack and stroke.
How much does critical illness insurance cost and what cover do I receive?
The cost of a critical illness insurance policy varies based on your current health condition, as well as how much cover you require. The quote you receive is calculated similarly to life insurance policies, which take into account your age, lifestyle, profession and the cover amount required.
So, this means a relatively healthy person in their mid-30s, for example, who is a non-smoker in a low-risk or “normal” job, would receive a more competitive quote compared to a 70-year-old smoker with a history of heart disease. According to Aviva, their customers pay an average of around £17.50 per month, with premiums increasing the older you get due to a higher risk of illness.
Types of critical illness insurance
Insurance companies typically offer two types of critical insurance cover. The first type is level critical insurance cover, and the second is decreasing cover. Level cover is a policy where you decide how much cover you need, and how long you’d like to be covered for. With this type of cover, your monthly payments and cover stay the same throughout the whole policy term. Some providers also allow you to increase your cover amount according to inflation, so that if and when you receive a lump sum, the purchasing power will not have been eroded due to inflation.
With decreasing cover, your monthly payments stay the same, but as time goes by, the amount of cover you receive decreases as well. In a lot of cases, this type of cover is used to help pay a decreasing debt, such as a repayment mortgage, in the event that you’re diagnosed with a critical illness. It’s usually cheaper than level cover, as the cover amount decreases over time in the same way the balance of a loan or repayment mortgage does.
Do I need critical illness insurance?
There are several aspects to consider when deciding on critical illness insurance cover. The two types of critical illness insurance cover found above both have advantages and disadvantages. Let’s take a look at both options.
Level cover advantages & disadvantages
One of the main benefits of level cover is that your monthly payments stay the same, and your cover remains the same throughout the policy. Therefore, you know you will receive that tax-free lump sum (or slightly more if you top up to allow for inflation) at any period during your policy term.
The main drawback is that tends to be the more expensive option, as your cover amount does not decrease over time like that of decreasing cover.
Decreasing cover advantages & disadvantages
Because the cover on a decreasing policy reduces over time, the insurer has less to pay out in the event of a claim, so the monthly premiums tend to be cheaper than the premium on an equivalent level cover policy.
As we’ve seen, a decreasing critical illness policy is typically used to cover a repayment mortgage. The downside of this is that it will only cover the outstanding balance at the time of the claim, so it will unlikely be enough to cover any additional costs and any day-to-day expenses. For those with children or other dependents, this can result in a large shortfall in the funds you may require, versus what you will receive from the lump sum payout.
Summary
Critical illness cover is an effective way of providing you with a financial safety net if you are diagnosed with a serious health condition, or are unable to work due to a severe injury. The fact that you are able to receive a tax-free lump sum payment, and choose to allocate the funds how you wish, means it’s a very flexible type of cover. For example, you can choose to distribute this towards mortgage payments, monthly expenses, or as a cushion to make up the monthly income gap which is left as a result of not being able to work.
With there being two main options - level and decreasing cover - you’re able to choose whether a fixed amount of cover would suit you best, or if you simply want a policy which covers your mortgage if the need arises. Regardless of your choice to opt for a level policy or a decreasing policy, any form of critical illness cover can certainly offer great peace of mind. Monthly premiums can be as low as £15-£20 a month, and with a multitude of insurers offering policies, the younger you are the better your chances of accessing competitive policies with the lowest monthly charges.