Women are more likely to suffer from a serious illness than men and a serious or life-threatening illness can have can have devastating consequences on your finances. Critical illness insurance, which pays out a tax-free lump sum if you’re diagnosed with a serious illness, might seem like the answer. Do you need it?
Critical illness insurance; the basics
Critical illness insurance used to cover only a handful of diseases, such as heart attack, stroke and cancer but these days many policies cover 30 or more illnesses. You can use the lump sum from a critical illness policy to pay off your mortgage or to buy some breathing space while you work out whether or not you can return to work.
Critical illness insurance may cover:
- A limited range of illnesses, including stroke, cancer and heart attack. Be aware that although policies cover ‘cancer’, there are strict definitions of the type of cancer and the stage it should be at before it will trigger a payment.
SAVVY TIP: For example, if you were to develop an early form of breast cancer known as ductal carcinoma in situ (DCIS), you would be unlikely to qualify for a payout from the majority of critical illness policies. DCIS is non malignant but has the potential to become malignant. If it’s treated early enough it can be contained, but women who have it are advised to take time off work to recuperate, which your critical illness insurance would be unlikely to cover. There’s more information about DCIS at the Macmillan website.
- A broad range of illnesses and injuries (around 35 is not unusual across the industry): The more diseases your critical illness policy covers, the higher the premiums are likely to be.
SAVVY TIP: Although a comprehensive critical illness policy might give you peace of mind, it’s worth knowing that 75-80% of all critical illness claims arise from strokes, heart attacks, cancer and multiple sclerosis.
How much will you pay?
Your premium will depend on a number of factors, including:
1. Your age
2. Your state of health
3. The size of lump sum you want to insure
SAVVY TIP: If you have high blood pressure or are overweight, some critical illness insurers charge you higher premiums while others will not. Ask your broker or financial adviser about companies that do not charge higher premiums if you are overweight or have high blood pressure.
If we assume that a policy lasts for 25 years, that rates are guaranteed (i.e. that they will not increase above inflation over the life of the policy) and that life insurance is included, figures from brokers LifeSearch show that:
- £150,000 of cover would cost a 30-year-old non smoking woman (or man) £33.66 a month,
A 40-year-old woman or man would pay £71.47 for the same level of cover.
A 40-year-old woman or man with high blood pressure could pay between £100 and £150 a month.
How do policies vary?
Many types of insurance policies have a clever habit of looking the same on the surface but varying when you get down to the small print. Sadly, critical illness insurance is no exception. The insurers’ trade body, the Association of British Insurers, has taken steps to give consumers clearer information and to introduce a code of practice but you can’t assume that two policies will offer the same cover.
- Most insurers have a cut-off level for claims: You either qualify for the full amount or you don’t qualify at all. However, a number of companies will pay a percentage of the amount you’re insured for if you have a milder form of an illness so wouldn’t qualify for the full amount.
- Many insurers cover around 30 different specified illnesses, but some cover as many as 150.
- Some insurers will let you add on extra cover. For example, one insurer offers mastectomy cover, which will pay out £15,000 or up to 20% of your critical illness cover (whichever is the lower) if you need to have a total mastectomy.
If you have a pre-existing condition, your cover will be limited.
- You won’t be able to get cover for an illness you’ve already suffered from. You are normally asked to take a medical at the time you apply for a policy and your insurer may ask for medical details from your doctor.
- You may not be covered for related illnesses. This can be something of a grey area and, in the past, some insurers certainly used this to try to wriggle out of making claims. However, the payout rate has improved significantly recently with 97.2% of claims paid in 2015 (compared with over 90% in 2008, for example).
SAVVY TIP: If you think that you’re likely to get an exclusion added to your policy (perhaps because you’ve had ongoing back problems or have already been treated for cancer), ask your broker or financial adviser about insurers that will reduce your premiums once they’ve added the exclusion. Some insurers are happy to exclude claims from an illness you’ve already suffered from, but won’t reduce your premiums.
These policies can be expensive, but opting for the cheapest one may not be give you the cover you want. If you’re going to buy critical illness insurance, My recommendation is to take advice from a broker or adviser who specialises in this market.
According to specialist brokers LifeSearch there are several insurers that will reduce your premiums once they’ve added an exclusion.
Aegon, AIG, Friends Life, Legal & General, LV=, Old Mutual Wealth, Royal London, Scottish Widows, Vitality and Zurich.
Those that don’t reduce premiums include:
Aviva, Beagle Street and Canada Life.
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