Your IndustryOct 17 2013

Pros and cons of a critical illness policy

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A critical illness policy cannot make you better, but Steve Payne, managing director of protection for Friends Life, points out it can give a client financial help when they need it most. This, he says, is valuable as it allows the individual to focus on their health.

Peter Hamilton, head of retail propositions for Zurich, agrees, saying a policy payout might be used “to pay for medical treatment or changes that need to be made to the home as a result of an illness - or even paying off a mortgage”.

He adds: “Many critical illness products also include free cover for policy holders’ children - also offering a lump sum payment for a successful claim.”

That the plans pay a known amount when suffering a life-changing a condition makes this product ideal for mortgage protection, personal and key man insurance, according to Alan Lakey, senior partner at advisory firm Highclere Financial Services.

Jennifer Gilchrist, senior product development manager of Bright Grey and Scottish Provident, says people should consider critical illness due to the simple fact that they are more likely to suffer a critical illness than die before retirement.

Cost should not be an issue as critical illness policies are flexible enough to provide cover to suit any budget, Ms Gilchrist says, adding that some policies have ‘added value’ support services.

“People often think that critical illness cover is expensive - £20,000 worth of life or critical illness cover for 25 years for a 35-year-old (non-smoker) can cost as little as £9 per month. Your client can take out a small amount of cover if their budget is tight and increase this when the time is right.”

People can also rest assured that most claims are paid. Critical illness claims paid across the industry were 91 per cent in 2012, according to the Association of British Insurers.

In terms of downsides to critical illness, Ms Gilchrist highlights that while policies are proven to pay out on the illnesses covered, there are often strict definitions in the policy and if your client’s condition doesn’t meet this their claim will not be paid.

Mr Lakey warns critical illness policies cannot replace a dedicated income protection plan that provides income during periods of inability to work, particularly because critical illness typically does not cover stress-related conditions.

“The majority of claims for income protection are musculoskeletal or stress-related and critical illness plans do not extend to these situations.”

Ms Gilchrist agrees, saying that critical illness cover alone may not be enough and that income protection should be taken out if cover is needed for a temporary sickness absence from work as this is not covered by a critical illness policy.

Zurich’s Mr Hamilton adds that while a lump sum payment will be invaluable to most customers, a critical illness policy won’t provide a regular income, for example to replace a salary.