What is critical illness insurance?

  • Shunil Roy-Chaudhuri, Personal Finance and Investment Writer
  • 08 September 2023
  • 5 mins reading time

Undergoing a serious illness or disability is challenging enough in itself. But it could have a large impact on your finances too, particularly if you have to stop working.

Critical illness insurance can, though, offer vital financial support and may take some of the stress out of the situation.

This type of protection provides you with a tax-free lump sum if you are diagnosed with certain illnesses or disabilities (although some policies give you the option to receive regular income payments instead via family income cover). The kinds of illnesses and injuries often covered include heart attack, cancer and loss of limbs. This lump sum could give you the reassurance that you would potentially have the financial resources to pay for items such as medical bills, home and personal adjustments required due to the illness, or a mortgage.

When taking out critical illness cover, you’ll need to decide how large a lump sum you need, how long you want the policy to run for and if you want the sum to increase with inflation. So you might decide you want £75,000 of cover that increases with inflation and lasts for a 20-year time period. You pay higher premiums for higher lump sums insured.

Critical illness insurance can be contrasted with life insurance, which only pays out on death. It can also be contrasted with income protection insurance, which provides an income if you’re unable to work but doesn’t pay a lump sum. So, if you have life insurance and income protection insurance, but not critical illness cover, you may struggle to cope with any significant one-off medical bills or domestic changes resulting from a critical illness.

What determines the cost of monthly premiums?

You pay for critical illness policies through monthly premiums. The cost of premiums varies from person to person, in line with the following factors:

  • Age. Older people typically pay more, as they have a greater risk of becoming ill.

  • Health. People with good health generally pay less for cover.

  • Gender. Men can pay higher premiums as they make slightly more claims than women.

  • Occupation. Cover will cost you more if your job has health risks.

  • Activities. You may have to pay more for cover if you take part in hazardous activities, such as rock climbing.

  • Lifestyle. People who smoke or have above-average alcohol intake usually pay more for insurance.

Critical illness policies typically cover the following illnesses and injuries:

  • Heart attack

  • Stroke

  • Cancer

  • Major organ transplant

  • Parkinson’s

  • Dementia, including Alzheimer’s

  • Multiple sclerosis

  • Kidney and liver failure

  • Traumatic head injury.

Most policies also consider payouts for permanent disabilities as a result of injury or illness and some policies make a smaller payout for less severe conditions. When considering a critical illness policy, you should read the list of conditions covered carefully and be honest about any family history that may prevent a claim. Policies can also cover your children, but the sum insured for them is typically half that of your own policy.

Exclusions from critical illness policies

If you have a pre-existing medical condition or suffered from a serious illness in the past then you should still be able to take out a critical illness policy. But it is likely that a higher premium will be payable and you won’t be covered for the pre-existing condition.

Critical illness policies expire after a payout has been made. So you’ll have to start a new policy if you have received a critical illness payout and want to continue with this type of protection.

Cover options

You can buy critical illness cover as a standalone policy for yourself alone, or as joint cover, perhaps for your spouse or partner. Joint policies are often cheaper than two standalone policies but only offer one potential payout, after which the joint policy ends and the second policyholder loses the protection.

You can also select the time period for the policy. You may just want to cover the duration of your mortgage term. But you can get cover for 40 years or more, or you could opt for a shorter term of, say, five years. Insurers generally won’t provide critical illness cover beyond a specified age, typically between 70 and 80.

Critical illness policies can offer a choice of reviewable or guaranteed premiums. Reviewable premiums are generally reviewed after a particular period of time, usually every five years, and are likely to increase at each review. In contrast, guaranteed premiums are fixed for the term of the policy, but can cost more to start with.

Policies also offer the option for the lump sum insured to increase or decrease during the course of the term, in line with your needs.

Combined critical illness and life cover

Critical illness is commonly bought alongside life insurance. There are two types of combined life and critical illness insurance:

Life and accelerated critical illness insurance. This will pay out on either death or the diagnosis of a serious illness, but not both. So there would only be one lump sum payout in the case of a person who is diagnosed with cancer and who dies sometime later.

Life and additional critical illness insurance. Someone diagnosed with a serious illness would receive a payout and the life insurance would remain in place. So there would be two payouts in the case of a person diagnosed with cancer who died sometime later. Unsurprisingly, this type of cover is more expensive but does offer greater protection.

Critical illness insurance can form a key part of your protection and financial planning needs. There are a range of options to consider when taking out this kind of cover. A financial adviser can guide you through these options and help you decide if critical illness insurance is right for you, as this article is for information purposes only and is not intended as advice.

In the end, the protection you need will depend on your individual circumstances. Regularly reviewing your cover can provide reassurance that a suitable financial safety net is potentially in place for you and your family. At Schroders Personal Wealth, one of our key principles is to have regular reviews with a financial adviser.

Important information

Fees and charges apply at SPW.

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or part) without our prior written consent.

In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing but can give no assurance or warranty regarding the accuracy, currency or applicability of any of the contents in relation to specific situations and particular circumstances.

Protection policies have no cash-in value at any time. If you don’t pay your premiums on time your cover will stop, your benefits will end, and you'll get nothing back. If the benefit amount has not been paid out by the end of the selected term, the policy will end and you’ll get nothing back.

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