Protection  

Critical illness: Everything you need to know

    CPD
    Approx.30min

    Critical illness cover is described by the Money Advice Service as a long-term insurance policy which pays a tax-free ‘lump sum’ – a one-off payment – if you’re diagnosed with one of the serious illnesses covered by your insurance policy.

    In terms of one sentence that’s not a bad start, but it does not tell the full story. Critical illness, for example, can also pay an income, while of course policies vary significantly from one to the next.

    CI was founded by Dr Marius Barnard, with the first product being launched in October 1983 in South Africa, under the name ‘dread disease insurance’. Since then the cover has been accepted into many insurance markets around the world with varying names, including trauma insurance, serious illness cover and living assurance.

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    In the UK it has become a staple of financial planning for many families with around half a million people each year buying some form of cover. In 2011, the Lloyds Banking Group sold more CI than any other firm in the UK with providers such as Legal & General, Friends Life and Aviva not too far behind.

    Product basics

    Today most CI plans typically cover around 30-40 conditions, which include the more common examples such as heart attack, stroke and cancer, but can also include conditions such as CJD, Encephalitis and Crohn’s disease, for example, which are perhaps less common.

    Cover is typically bought alongside life insurance and therefore can be structured in pretty much the same way as life insurance – level, decreasing, indexed, mortgage decreasing, whole of life, family income benefit, joint or single life and so on. In fact, more than 95% of all CI policies sold in the UK include life cover. The stand alone market has quite rightly been very small for a number of years.

    There are a few sound advice driven reasons why stand alone CI cover has become quite rare. First there is price: for various marketing, claim and tax reasons the cost of CI including life cover is pretty much the same as buying CI on its own, so you might as well. Secondly, insurers need to be clear on what is a death claim and what is a CI claim. If we think about someone who suffers a heart attack and dies a week later, is that a death claim, a CI claim or both?

    The way insurers deal with this is to have a ‘waiting period’ written in to the policy, which is typically around 21 days. If the policyholder passes away during this time it’s a death claim, and if not it is a potential CI claim.

    If someone has stand alone CI and dies within a week or two of suffering a heart attack the plan would therefore not be expected to pay out. But if life cover was included, which is unlikely to have impacted much on the cost, this issue is removed, which explains why stand alone CI is so rarely sold.