Everything you need to know about critical illness cover

Being diagnosed with a critical illness or disability can be devastating, often impacting not only your body and mind, but also your finances.

While planning for serious illnesses can seem grim, considering your options could take away some of the financial stress if you need to stop work to focus on your recovery.

One option to help protect yourself and your loved ones is critical illness insurance (or cover), which can provide you with peace of mind that if you’re diagnosed with an illness you’d still be able to pay your bills and support your dependants. Here, we will explain what it is, who might need it, how to work out how much cover you need and some key considerations you should investigate before purchasing a policy.

How does critical illness insurance work?

Critical illness insurance is designed to pay out a tax-free lump sum if you are diagnosed with one of the serious illnesses or disabilities predefined in the insurer’s policy, during the policy term.

These illnesses and disabilities are often long-term and, as a minimum, usually include some cancers, heart attacks and strokes, but might also include multiple sclerosis and Parkinson’s disease. An important point to be aware of when reviewing policies, is that not all conditions are covered by critical illness insurance. The illnesses and conditions covered will vary from provider to provider, so it is very important for you to read the small print before committing to a policy.

Critical illness insurance can be purchased as a standalone product, but is often purchased alongside a life insurance policy, either as:

  • A combined policy: A cost effective option which ties the two policies together. The drawback is that combining the policies often means that you will only be eligible for one payout. So, if you claim against the critical illness insurance element of your policy, you won’t subsequently be able to claim against the life insurance portion of the package.
  • Additional cover: this is usually the more expensive of the two options, but will provide you with two separate policies and therefore a payout for both scenarios: if you are diagnosed with a critical illness and when you die.

Do I need critical illness insurance?

Understanding how you would support yourself if you were diagnosed with a serious illness and became too unwell to work can help you decide whether critical illness insurance is right for you.

While government support (Employment and Support Allowance) is available for eligible individuals who are unable to work due to medical conditions or disabilities, the amount available ranges between just over £70 and £110 per week, which may not be enough to cover your living costs. You can find out more about some of the government benefits you may be eligible for in our article Benefits if you have a health issue or disability.

Some of the other key points you should consider when deciding if critical illness insurance is a good option for you include:

  • Workplace benefits: Does your employer have a policy which will provide you with sufficient payment if you are diagnosed with a long-term illness? Your employer is only legally required to pay you statutory sick pay, (£95.85 per week for 28 weeks, if you meet the eligibility requirements) so it is worthwhile checking whether they offer additional benefits.
  • Personal savings: Ill health combined with an inability to work can rapidly deplete personal savings. If you don’t have a substantial savings pot, critical illness insurance could provide the reassurance that there will be a lump sum for you to draw on.
  • Any existing illness insurance: there are a number of similar products on the market that may provide you with some protection should you fall ill. These products might include life insurance, income protection insurance and payment protection insurance. People often take these out as part of their mortgage application, or as a combined policy with their life insurance, so it is worth checking whether you have any of these.

If any of these points leave you in doubt that you would be able to cover your living costs, it may be worth considering critical illness insurance.

How do I work out how much cover I need?

There is no ‘one size fits all’ figure for the amount of critical illness insurance you may need. Your personal finances are unique and to make sure the payout covers your costs, you’ll need to think about your outgoings and expenses.

Many people want to have enough to pay off some or all of their mortgage, or to cover childcare or education costs for their children.

An example of this may look something like this:

Julie (51) and Paul (54) have a joint income of £55,000 a year, they have two children (17 and 15) and an outstanding mortgage of £180,000 which they expect to pay off in 15 years. Their monthly outgoings are £1,500.

Julie’s company offers a long term sickness policy that will pay her full salary for six months, equating to just over £12,000, or around £2,000 a month.

Paul’s work will provide Statutory Sick Pay, giving him £96.35 per week for 8 weeks, which adds up to just under £2,700.

When Julie and Paul bought their home, they took out payment protection insurance, which will cover their mortgage costs for 12 months if either of them is not able to work due to sickness or unemployment.

Julie and Paul decide that they will need £18,000 of critical illness cover to pay for some of the mortgage and a further £32,000 to cover other costs such as their regular outgoings, and possible home alterations. They would like to have this as additional protection during the lifetime of their mortgage, so they take out a policy for £50,000 over a 15 year term.

If you’re trying to work out roughly how much cover you might need, here are some of the things you’ll need to consider:

  • Rent or mortgage payments – one of the major reasons people take out critical illness insurance is to ensure they will be able to pay their mortgage in the event of serious illness. Calculate how much you have left to pay on your mortgage, or add up your rent for a period time
  • Bills – calculate the costs of your household bills, such as gas, electric, council tax, water, home insurance, mobile phone and so on
  • Debts or Loans – add up the cost of any outstanding debts or loans that you are in the process of paying off
  • Financial dependants – if you have children or other dependants, calculate how you will ensure they are provided for.
  • Medical expenses – you may find yourself in a situation where you need to make changes to your home following your illness, it may be worth considering these costs
  • It’s also worth thinking about inflation, or the rising cost of living, to ensure your estimates will still cover your costs in the future when prices are higher.

Once you have added this all up, you will have a rough estimate of how much you would need the insurance to cover over a portion of time. It’s worth bearing in mind that if you are lucky enough to be able to cover a portion of these costs (for example through savings, or support from a partner), or if your employer provides generous sickness benefits, you may need a smaller amount of cover, which can help bring the cost of your premiums down.

How much does critical illness insurance cost?

As with any type of insurance, the higher the value of the cover or pay-out, the higher the monthly payments (premiums) are likely to be. A number of factors will determine the cost of your premium, including:

  • Your age
  • The sum insured (the amount the policy will pay out in the event of a claim)
  • How long you want to be covered for (the term of the policy)
  • Whether you smoke or have previously smoked
  • Occupation – the more manual or specialist your role, the higher the cost your premiums are likely to be
  • Health – your current health, your weight and your family medical history. If you have any pre-existing conditions, for example, you may only be covered by certain insurers and your premiums are likely to be higher.

It is essential that you are honest when applying for critical illness insurance. Any information you leave out or provide incorrectly may lead to your insurer refusing to pay out. Properly calculating the pay-out amount you need will ensure you aren’t subject to unnecessarily high premiums.

Other things to consider

There are several other things you may need to think about when choosing a critical illness policy.

Fixed, reviewable and decreasing premiums

When purchasing critical illness insurance you may be given the option of fixed, reviewable or decreasing premiums.

  • With fixed premiums, as the name suggests, you pay the same amount every month for the duration of the policy, with the payout amount remaining the same. While this option tends to be more expensive in the short term, it allows you to budget a specific amount on an ongoing basis and have the assurance of a fixed payout at any point in the policy term.
  • A reviewable premium can be reviewed after a period of time – typically every five years. While the upfront cost of policies with reviewable premiums tends to be lower in the short-term, it is possible that after a few years, costs could go up considerably, with premiums influenced by factors such as your age and medical advances.
  • A decreasing premium could be a good option for those wanting to protect a long term loan or a repayment mortgage. Over the course of the policy term, the payout amount will slowly decrease, in line with the loan or mortgage value. To account for this, you will likely pay a lower, but still fixed, price per month than a fixed policy.

Additional benefits

When buying cover, it’s worth checking whether the policy you’re considering comes with any additional benefits. For example, some come with access to medical helplines, which may be useful if there are any aspects of your condition you’ll like to discuss.

Some insurers offer free child cover, which will payout a percentage of the cover amount if your child is diagnosed with a critical illness. Always read the small print carefully, so you’re aware of any extra benefits your policy may provide.

Alternative products

Everyone’s situation is different and with a number of protective insurance products available on the market, there may be a better option for your needs. Some products that are often sold alongside, or instead of, critical illness insurance include:

  • Income protection insurance – essentially insuring your income in case you fall ill or have an accident that prevents you from working. You will receive a percentage of your salary from the insurer (usually around half).
  • Life Insurance – this is designed to pay your loved ones a lump sum when you die. Find out why life insurance is important in our article Why life insurance matters.
  • Payment protection insurance – this  is a type of short-term income protection policy which will usually pay out for up to a year if you can’t work because you’ve lost your job, are unwell or have had an accident.

It’s a good idea to get quotes from several different insurers before buying any type of protection insurance, as premiums will vary depending on who you go to.

We work with two different insurance brokers who can help you compare the cost of cover and find the right policy to suit your needs. They are LifeSearch and ActiveQuote. With LifeSearch, you simply enter your name and contact details and a LifeSearch adviser will call you at a convenient time to provide you with fee-free advice and no obligation quotes.

With Active Quote, you can compare quotes and arrange cover online, choosing how much cover you want, and how long you want your policy to last. Again, the service is fee-free.

Are you thinking about buying critical illness cover, or have you recently taken out a policy? Perhaps you already have cover, and have made a claim? If so, we’d be interested in hearing from you. You can join the money conversation on the Rest Less Community or leave a comment below.

Links with an * by them are affiliate links which help Rest Less stay free to use as they can result in a payment or benefit to us. You can read more on how we make money here.

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