Critical Illness Insurance

Where does Critical Illness Insurance fit in?

Private Medical Insurance is the most sought after employee benefit after pensions. This is because it provides you with quick medical treatment for acute conditions. You can also have accommodation in a private room more akin to a good hotel than a normal hospital ward. However, it does not help you financially if you are ill for a long time.    

Income Protection Insurance is the type of health insurance that every employed or self-employed person should have. This is because it will provide a replacement income if you are unable to work through any form of disability. Right up until retirement age if necessary. However it is not very popular. The reason is that people simply don’t like to think that they will ever be ill for more than a few weeks at most.

Critical Illness Insurance is designed to pay out a lump sum. You would receive this if you are unfortunate enough to suffer from any of the specified critical illnesses in the policy. You also need to survive for a period of time after diagnosis (normally 28 days).  Why is it more popular than Income Protection Insurance? The answer is that people usually know someone among their family or friends who has had a heart attack, stroke or cancer, the main illnesses covered.

Use of Critical Illness Insurance

You would receive a lump sum following a successful claim on a Critical Illness Policy. This would enable you to fill a gap in your financial planning caused by your serious illness or accident.  So for example, it could be used to pay off part, or all, of your mortgage or other debts. It could be used to beef up your pensions and investments if you are having to retire early. In some cases it would enable you to adapt your house to accommodate your disability. You might want to pay for specialist treatment in the UK or overseas. In very serious cases it could pay for things like nursing care and home-help. 

If you were unable to continue with your previous employment you might decide to use the money to set you up in business on your own.  It is simply a cash sum, so its uses are endless. Your own circumstances and requirements will decide how it is used.  You do not have to pay the money back when you recover!

Are you aware that statistically you are much more likely to be diagnosed with a critical illness than die during your working life?  Please look at the chart below. This shows that a non-smoking man age 40 is 4.1 times more likely to be diagnosed with a critical illness than die before retiring at 65 years old (Source Pacific Life Re, March 2018).

Type of Critical Illness product

You can apply for critical illness insurance as a stand-alone product as well as an addition to other protection products.  It can, for example, be used, as a mortgage protection type plan or for general family protection.

Critical Illnesses covered

The illnesses covered can be typically split into three groups as follows:

• Life threatening – such as Cancer or liver failure.

• Disabling – such as multiple sclerosis or Parkinson’s disease

• Traumatic – such as heart attack or stroke

Such groups are designed for clarity within policy documents but a heart attack could be both life threatening and traumatic.

Core Critical Illness conditions

Most insurance companies will provide cover for what are known as the three ‘core conditions’. These account for the majority of claims.  These are cancer, heart attack and strokes. 

Other conditions

The comprehensiveness of how a particular insurance company defines each condition varies enormously.  You should make sure that you study the product provider’s literature. This will help you determine what will and will not be covered. And in this way ensure it meets your purposes and particular health concerns.

The Association of British Insurers (ABI) has set out detailed guidelines for insurers. These identify what they believe should be the minimum standard definitions. These cover both the core and a wide range of other conditions that insurers provide. So you should check whether any insurer is at least offering the ABI definitions of disability.

The following are currently defined by the ABI:

• Cancer – excluding less advanced cases
• Heart attack – of specified severity
• Stroke – resulting in permanent symptoms
• Alzheimer’s disease [before age x] – resulting in permanent symptoms
• Aorta graft surgery – for disease
• Benign brain tumour – resulting in permanent symptoms
• Blindness – permanent and irreversible
• Coma – with associated permanent symptoms
• Coronary artery by-pass grafts – with surgery to divide the breastbone
• Deafness – permanent and irreversible
• Heart valve replacement or repair – with surgery to divide the breastbone
• Kidney failure – requiring permanent dialysis
• Loss of speech – total permanent and irreversible
• Loss of hand or foot – permanent physical severance
• Major organ transplant – from another donor
• Motor neurone disease [before age x] – resulting in permanent symptoms
• Multiple sclerosis – with persisting symptoms
• Paralysis of limb – total and irreversible
• Parkinson’s disease [before age x] – resulting in permanent symptoms
• Third degree burns – covering 20% of the body’s surface
• Total permanent disability”
• Traumatic brain injury – resulting in permanent symptoms

Some companies will offer you guaranteed or fixed premiums. Other insurers reserve the right to review your premium levels on a periodic basis. 

Terminal Illness Benefit

Some companies will offer you a terminal illness benefit.  In the event of your being diagnosed as suffering from a terminal illness. This is one where your expectation of life is less than twelve months. In this case the sum assured under the contract will become payable.

Permanent Total Disability

It is usual to include cover for you in respect of permanent total disability within the contract.  The definition of Permanent Total Disability does vary. Some insurers define it as being unable to follow your normal occupation as a result of a disability. Others will define it as being unable to independently perform three or more activities of daily living (ADLs) as a result of sickness or accident.

Waiver of Premium

This option ensures that premiums continue to be credited to your policy in the event that you are unable to work as a result of accident or sickness. This benefit commences after a specified period of absence, referred to as the deferred period.

Children’s Benefit

The critical illness benefit can often be extended in the plan to cover young children.  The cover levels are normally expressed as a percentage of the basic cover under your plan.

• Information given relating to Income Tax legislation and Social Security benefits is based on our understanding of legislation and practice currently in force.   Whilst we believe our interpretation of current law and practice to be correct in these areas, we cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. 
• In particular you are warned that levels of tax and tax reliefs and also State Benefits are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances. 
• If for any reason you cease contributions cover will lapse. 
• Failure to disclose any requested or relevant information may affect any claim.
• Payment will not be made for a critical illness claim arising from an excluded cause.
• Your plan has no surrender value.
• At the end of the term selected, cover will cease and no further benefit will be payable.
• These notes are intended as a guide only and do not replace the full product details that accompany each Income Protection Insurance illustration.

Links to other types of health insurance

• Income Protection insurance
• Private Medical insurance
• Care Fees funding
• Money Advice Service notes on Critical Illness Insurance
• If you need personal financial advice on Critical Illness Insurance then I am happy to introduce you to Flying Colours Life who have access to independent financial advisers throughout the UK

Important

This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.

If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.