Defaqto

What illnesses are covered?

Typically, critical illness policies cover a set of core conditions specified by the Association of British Insurers (ABI), including cancer (excluding less advanced cases) and heart attack (of specified severity), which account for the majority of claims.

In addition to these conditions, most policies will include cover for a variety of other illnesses. The average number of conditions covered across the market is 27, although some policies cover as many as 38.

Below is a list of the conditions that are covered by 50 per cent or more of critical illness policies on the market. However, you should check your individual policy as some insurers exclude AIDS and HIV-related illnesses and certain mild forms of cancer.

• Alzheimer's disease
• aorta graft surgery
• aplastic anaemia
• bacterial meningitis
• benign brain tumour
• blindness
• cancer
• children’s critical illness benefit
• coma
• coronary artery bypass
• Creutzfeld-Jakob disease
• deafness
• heart attack
• heart vale replacement
• HIV infection
• kidney failure
• loss of hands or feet
• loss of independence
• loss of speech
• major organ transplant
• motor neurone disease
• multiple sclerosis
• paralysis of limbs
• Parkinson’s disease
• pre-senile dementia
• stroke
• terminal illness
• third degree burns
• total permanent disability
• traumatic head injury

Understanding what your policy covers

It is essential that you understand that a critical illness policy will only pay out:

• on the illnesses covered by the individual policy;
•  if the severity of your illness meets the requirements of the insurer’s definition; and
• under some policies, if the illness has persisted for a certain length of time or has caused some permanent impairment.

For example, the cancer definition is not designed to cover every one of the 200 or so types of cancer that exist. It is intended to provide cover more advanced cases. In addition, some early stage cancers and those that do not spread will not be covered.

Survival period

Critical illness benefit will only be paid if you survive for a certain period after you meet the claim requirements. Under most policies this is 14 days, although under some policies it could be as long as 30 days.

Cover for children

Many policies will automatically provide cover for your children until they reach the age of 18. The amount payable and the definitions that apply to the cover for children may be different from the main policy.

After payment of a children’s critical illness claim, the main critical illness cover carries on and cover for any other children named on the policy will continue, but you can only make one claim per child.

When you take out a critical illness policy make sure you read the definitions to understand exactly what the policy will, and will not, cover.

Total permanent disability cover

Most critical illness policies include total permanent disability cover, in addition to cover for specific illnesses.

Claims for this element of cover are not based on diagnosis of one of the listed critical illnesses. Instead, to qualify for this benefit, your health must be so severely impaired that you are permanently and totally unable to work.

To assess whether you qualify, the insurer will consider your level of incapacity and ascertain whether you will ever again be able to do your ‘own job’, ‘any job’, or ‘any job to which you are suited.’

Under some policies, the insurer may assess this benefit against your ability to perform a number of activities or tasks.

If you meet these very stringent claim criteria, the full benefit will normally be payable and the policy will end.

Different types of critical illness policy

Critical illness insurance is usually set up to give you protection over a specific term, perhaps to match the term of a mortgage. It is also possible to arrange cover for the whole of your life.

When critical illness cover is arranged for a specific term it can be arranged in one of the following ways:

Level Term

The amount of cover remains the same throughout the term of the policy. Such policies are normally used to cover an interest-only mortgage or to provide family protection.

Decreasing Term

The amount of cover reduces each year, decreasing to nil at the end of the term. The cover can rfall by a fixed amount each year, or in line with a repayment mortgage to match the reducing debt.

Family Income Benefit

This type of policy is ideally suited to providing your family with a replacement income. If you suffer critical illness during the term of the policy, a regular income is paid to you for the remainder of the policy’s term.

The income can be paid monthly, quarterly or yearly. Some policies allow you to arrange for income to escalate each year by a fixed rate, typically by 3 or 5 per cent.

Critical illness with life cover

If you choose to arrange a critical illness policy with life cover, the policy will pay out either on your death, or on diagnosis of a critical illness, whichever happens first.

WARNING!

It is important to understand that if the policy pays out for critical illness, the policy will come to an end and the life cover benefit will be lost. Arranging cover in this way is an economical way of providing cover for a mortgage debt against death or critical illness.

Critical illness without life cover

It is possible to arrange critical illness cover without integrated life cover. Under this type of policy, the lump sum benefit will only be paid out if you satisfy the claims criteria for one of the listed conditions. If you die, the policy will end and no benefit will be paid.

Some critical illness insurance polices offer other options, at extra cost, which provide added protection for you and your family.

Critical illness policies are designed to provide long term protection. Over time, inflation can erode the value of what was once an adequate level of benefit. This is particularly important if your insurance has been taken out to protect your family.

Many policies include a valuable option whereby your cover increases in line with inflation each year, but remember that as the amount of cover increases, your premium will go up as well.

Waiver of premium

Some policies include the option to take ‘waiver of premium.’ This ensures that the premiums payable on your policy are maintained, if you are unable to work due to long term sickness or disability.

This starts after a certain period of time (the deferred period) following your incapacity. This can be one, three, six or 12 months depending on your circumstances and the particular policy you have chosen.

When choosing the deferred period, check on any sickness related benefits your employer would pay you if you were unable to work for a long period. Typically employers will pay your salary for 3-6 months.

Increasing cover

Marriage, the birth of a child, divorce and moving home can all bring with them additional financial commitments and the need to review your critical illness cover.

You could take out a top-up policy. If your health has deteriorated since you took out the original policy, this may be expensive or not possible.

Some policies include ‘insurability options’ that allow you to increase the cover within a set period, following a major life event such as marriage, birth of a child or increasing your mortgage.

Currently, over three quarters of critical illness policies include guaranteed insurability options.

When might my policy not pay out?

A critical illness policy will not pay out if your illness does not meet the definitions stated in your policy wording. In addition, if you did not fully disclose all details of your medical history when applying for the cover, the insurance company may refuse to pay a claim.

Most policies include a large number of exclusion which vary from policy to policy, but the most common are as follows:

• alcohol/drug abuse
• participating in a criminal act
•  HIV/AIDS, except where covered by the policy
•  refusal to seek or follow medical advice
•  self-inflicted injury
•  war and civil commotion

WARNING!                            

• Be sure to read the policy’s terms and conditions so that you understand exactly what the policy does, and does not, cover.
• Be scrupulously honest about your medical history if you want to avoid having a claim turned down because of ‘non disclosure.’

Even a minor medical condition which you suffered from many years ago could be deemed relevant by your insurer and cause it to reject a claim, if it felt that you had deliberately hidden relevant information.

Some insurers have rejected claims even if the nature of the non disclosure bore no relation to the claim  Up to 20 per cent of critical claims are rejected by some insurers because of non disclosure, so it is essential to declare all medical conditions you have ever suffered from, however trivial they may seem.

How much will it cost?

Critical insurance gets more expensive as you grow older. This is because premiums for critical illness policies are based on factors such as your age, gender, state of health, lifestyle (smoking and obesity), and the term and level of cover you require.

Guaranteed premium rates

60 per cent of critical illness policies offer guaranteed premium rates, which means that, unless you change the policy, the premium will remain the same throughout the term of the policy.

Although guaranteed premium rates are more expensive than reviewable rates, they provide certainty that the cost of the insurance will not increase, unless you change the terms of the policy.

Reviewable premium rates

Some policies have ‘reviewable’ premium rates, which means the insurer will review your premiums every five years, although some reviews take place more frequently.

WARNING!

It is important that you read the terms and conditions of the policy and that you understand the basis on which the insurer can increase your premiums.

Here are some typical rates:

Source: Defaqto February 2008

As with any purchase, cheapest is not necessarily the best. It is more important to find a policy that meets your current needs and is adaptable to meet your future needs.

How do I buy critical illness insurance?

We recommend that you seek advice from an independent financial adviser before buying critical illness insurance. This is because critical illness is a complex product and an IFA is required to explain why he or she has selected a product, based on whole of market research. If you have problems with a claim, your IFA will be able to assist you.

If you are applying for a very large amount of cover (usually over £400,000), or you have a history of ill health, the insurer may write to your GP for more details. In some circumstances, it may also ask you to undergo a medical examination with an independent doctor.

Once the insurer has all the information it requires, it will issue an acceptance letter, confirming the basis of the cover and the premium it requires you to pay. Occasionally, where an applicant has a history of ill health, it may charge a higher premium to reflect the increased risk.

High blood pressure, obesity and diabetes are just some of the conditions that could give rise to higher premiums. If the condition is very serious, the insurer may decline to offer cover.

Once you have accepted the terms offered, the policy can then be put ‘on risk,’ from which point you are covered.