If you want the financial safety net that you’ll receive a tax-free payment if you’re diagnosed with a serious medical condition, Critical Illness insurance can offer that.
This type of protection is designed to ensure you can maintain your standard of living and pay your regular commitments if you have to take an extended period off work due to a serious illness.
All Critical Illness plans cover serious cancers, heart attacks and strokes. Many also cover dozens of other conditions, from Parkinson’s disease and multiple sclerosis, to the loss of a limb.
When it comes to putting this type of cover in place, you typically have two choices. You can take out a stand-alone Critical Illness plan, or you can take it out in a combined policy that also includes life insurance.
According to FTAdviser, the vast majority of Critical Illness cover in the UK is arranged on what is called an “accelerated claim” basis. This is where both life cover and Critical Illness cover are included in the same policy, but only the first claim is paid.
The annual Swiss Re Term and Health Watch report shows that, since 2010, stand-alone sales, expressed as a percentage of total Critical Illness sales, have risen from 5.8% to 15.9%.
Additionally, the report confirms that stand-alone CIC sales jumped 31.3% on the year, whereas accelerated plan sales fell by 8.9%.
So, could a combined life and Critical Illness policy be a good choice for you? Or are you better off with separate protection? Read on to find out everything you need to know.
2 options when it comes to taking out Critical Illness protection
When it comes to your Critical Illness cover choices, you normally have two options.
Stand-alone Critical Illness cover
A stand-alone Critical Illness policy does exactly as the name suggests. It will pay out the sum assured – typically a tax-free lump sum – if you are diagnosed with one of the conditions covered under your policy within the term of the cover.
For example, imagine you take out £100,000 of level Critical Illness cover over a 20-year term.
As long as you have maintained your premiums, if you were to suffer a serious heart attack in 15 years’ time, your policy would normally pay a tax-free lump sum of £100,000.
You could use this money to:
- Repay some or all of your mortgage or other debts
- Replace income if you had to take an extended period off work
- Adapt your home if you need to make changes based on the condition you are diagnosed with
- Pay for specialist medical treatment.
If you die within the 20-year term without being diagnosed with such an illness, your policy won’t normally pay out. It is literally there to protect you in the event you’re diagnosed with a serious condition.
A life insurance and Critical Illness plan
Under an “accelerated claim” policy, your cover will include both life insurance and Critical Illness cover. The policy will pay out on either death or diagnosis of a condition covered under your policy – whichever happens first.
So, using the example above, if you had £100,000 of level Critical Illness cover over 20 years and you died after 10 years, the policy would pay out under the “life insurance” element.
Note that the policy does not pay out on both diagnosis of a critical illness and death.
So, for example, if you were diagnosed with a serious form of cancer within the policy term, your cover would normally pay the sum assured on this event. It would then end, and you would pay no further premiums.
If you subsequently died of your illness, there would not be a further payout.
A life insurance and Critical Illness plan can be more cost-effective
One of the key reasons why you might want to include life and Critical Illness cover within the same policy is that it can be a cost-effective way of arranging the cover.
FTAdviser reports that “the price differential is small, in fact sometimes a life and Critical Illness cover plan can even cost less than stand-alone Critical Illness cover. So, you kind of get the life cover part for free (or almost free).”
Studying the relative cost of a combines policy with stand-alone Critical Illness cover, the FTAdviser research revealed some intriguing findings.
Firstly, insurers AIG, Canada Life, Legal & General and LV= offer the same premiums whether you include life insurance or not. Here, the life insurance is essentially “free”.
With those insurers that do increase the cost, the differential is often marginal. A non-smoking male aged 46 wanting a £100,000 decreasing plan over 23 years found Zurich requiring an additional 57p a month, Scottish Widows an extra 58p, and Vitality an additional £1.72.
The study found that Aviva, with an additional £2.60, and HSBC, which charged an extra £5.69, charged the highest increases for a combined policy, whereas Guardian actually charged £6.73 a month less.
So, what does this mean?
With many insurers it will be cheaper to take out combined life insurance and Critical Illness cover than it is to take out two separate stand-alone policies. So, if you’re looking to keep your premiums as low as you can, this could be a good way to arrange cover.
Remember that your cover may be for different needs
If you’re looking to take out protection because you’d like your mortgage to be repaid if you die or contract a serious medical condition before you have repaid your home loan, a combined policy may be a useful option.
This type of policy can provide a tax-free lump sum in either eventuality to enable you to repay your mortgage. It will then lapse and you’ll pay no further premiums.
However, if you are looking for protection for other reasons, a combined policy might not be so appropriate.
Imagine you have a £100,000 outstanding mortgage with 20 years left to run, and two young children.
If you took a combined life and Critical Illness policy to protect your borrowing, and you were diagnosed with cancer in five years’ time, your policy would likely pay the sum assured, enabling you to repay your mortgage.
However, imagine you then died of your illness a couple of years later.
As your combined policy had ended on the payout, you would have no further life insurance available. There would be no payout to support your children, or to ensure financial security for your family with you no longer around.
In this situation, your life insurance and Critical Illness needs might be different. You might need a different amount of life insurance, or you want your cover to run for a different term. So, it may be more suitable to take out separate cover – even if it costs a little more than a combined policy.
Our experts can help establish the cost of cover so you can take the most appropriate protection
If you want the peace of mind that you have the right financial protection in place, and you’d like to consider a range of options, we can help.
We can scour the market and compare the cost of both stand-alone and combined life insurance and Critical Illness cover, enabling you to make an informed choice as to which is most appropriate for you.
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