What is critical illness life insurance?
When you buy life insurance you will usually be asked if you would also like to take out critical illness insurance, although it can also be purchased as a stand-alone policy. This type of cover means that if you are diagnosed with a serious or critical illness during the term of the insurance, you will receive a payout – usually a one-off tax-free lump sum.
You can choose how to spend this money – whether you use it to pay for private medical treatment, to make alterations to your home, or to pay-off your mortgage, and so on.
Which illnesses are covered by this insurance?
The critical illnesses covered vary from one policy to the next, so if you're considering taking out this kind of insurance it's important to compare several quotes and read the small print to check what you're covered for.
The most common illnesses covered include cancer, strokes, heart attacks, major organ transplant and Alzheimer’s disease, but you can never assume this is the case, and every policy schedule needs to be scrutinised in detail to find out what is included. For example, if you lose a leg, it may not be considered “critical”, whereas if you lose two, it probably is – and similarly only certain types of cancer may be covered.
Deciding how much cover you need
The level of security and the amount of compensation offered by your critical illness cover will depend on your monthly or annual insurance premiums, with more expensive premiums generally offering a higher level of cover (although your premiums will also be influenced by your health and lifestyle at the time when you take out the cover).
Consider the impact of loss of earnings if you were to becoming critically ill, and the extra expenses that you could face, such as the cost of making physical alternations to your home. You may want to plan for a big enough insurance pay-out to cover your outstanding mortgage. A general rule of thumb is to estimate an amount that is around three or four times your annual salary, if you can afford cover at that level.
Exclusions to watch out for
You will only be protected for those illnesses that are stated in the policy schedule as being included in the cover. Pre-existing illness may be excluded from the cover, as will conditions that run in your family. Other common exclusions include illnesses and conditions that result from certain activities such as dangerous sports, war, criminal activities and flying.
Consider waiver of premiums insurance
Another optional extra that you might consider purchasing alongside critical life insurance is waiver of premiums insurance. This makes sure that your life insurance premiums continue to be paid on your behalf if you are unable to work because of illness or injury.