It is very much taken for granted that your mortgage, debts, business debts or income should be protected in the event of an early death and so that your family can live on with dignity.
One type of insurance is often overlooked and should be considered by families and business alike. Critical illness cover has grown in attraction, particularly as the probability of suffering from such illnesses is growing.
I remember when I first arranged a critical illness plan that the probability of getting cancer was one in five. For those born after 1960, the actual probability is now one in two – a 50% chance.
Whereas a life insurance pays out on death, many of us may be diagnosed with a critical illness and survive, but having caused financial chaos in between time.
Critical illness cover pays out if you are diagnosed with one of a range of severe conditions:
A stroke, heart attack, cancer, multiple sclerosis, benign brain tumour, heart valve replacement, Parkinson’s, coronary artery by-pass being the main source of claims.
Cancer has been the cause of most claims for some time, with heart attacks second. Whilst 38% of cancers are preventable and smoking being the single largest preventable cause, in 2015 Cancer Research stated there was 359,960 new cases of cancer in the UK. In 2016, deaths from cancer reached 166,135.
Over the last 40 years however, cancer survival has doubled and now 50% survive cancer for ten or more years. There is however, a huge variation in survival between cancer types.
The benefit of a critical illness plan is that it will pay out on the diagnosis of a critical illness rather than death. This allows you to use the lump sum to repay a mortgage, pay down debts, seek medical treatment or simply allow yourself time off work stress free, giving you peace of mind and your body the best chance of survival.
However, most providers have a clause that requires you to survive for a minimum period after diagnosis – normally 14 days to three months depending on the provider.
Similarly, a director of a company could insure against the illness to pay out so a temporary replacement for them could be afforded by the company whilst they recuperate. Group insurers also provide such a plan for a company that pays out when any member of staff is diagnosed with such illnesses.
Choosing an insurer can be tricky as not all plans are the same. For example, Legal & General cover 43 conditions whereas Vitality Life cover 114. How well they are covered is another piece of research you would want your independent financial adviser to look for, as some companies are restrictive on what they consider to be a successful claim.
How much cover do you need? You should calculate what income or debts you would like to replace or pay off and for how long.
The longer you insure yourself for, the greater the chance of risk at the outset that the company will have to pay out, so the premiums will be inflated to cover that risk. For example, if you tried to insure yourself until age 85, the probability of an insurer having to pay out is very high as that’s the peak time for claims.
However, if you only needed to cover yourself for 25 years until your mortgage was paid off or until the children were through university, the premium for the shorter term cover which suits your needs would be much more competitive.
If you had a repayment mortgage, you could also keep your costs down with a decreasing cover which tracked the amount of your mortgage. From the outset the insurer knows the payment risk is reducing as you are getting older and closer to the age when you are at most risk of diagnosis and so the premium reduces accordingly.
An independent financial adviser would talk through the cover needed and then check the prices with every provider available so you and your family receive the best value for your money.
If you would like a comparison for critical illness, please call 01872 222422 or visit us at WWFP.net.
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Peter McGahan is Chief Executive of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.Last modified: June 10, 2021