Critical Illness Insurance.
What is a critical illness policy?
Critical illness cover pays a tax-free lump sum if you’re diagnosed with a defined critical illness during the policy term. It’s important to realise that not every critical illness will be covered and you will only have cover for the conditions listed on your policy.
Critical illness cover is often part of a combined policy with term life insurance and these policies normally only pay out once. For example, if you claimed a cash benefit after being diagnosed with a cancer there is usually no life insurance pay out if you die at a later date.
Do you need it?
Financial problems could come hand in hand with a serious medical diagnosis and a lump sum payment from a critical illness policy would clearly ease some of the distress involved.
If you’re single and without dependents then, depending on your financial commitments, a critical illness policy may be of more interest to you than life cover.
If you have children you may want to ensure your family is provided for in the event that you can’t work due to ill health. That said we’d recommend that you consider an income protection policy that will pay a regularly monthly payment in the event that you were unable to work due to ill health.
To ensure your partner or family is provided for in the event of your death then there are a number of types of life-insurance policies for you to consider.
1) Whole-of-life cover
As the name suggests, this type of policy will guarantee your dependants a payment irrespective of when you die. Higher net worth individuals may choose to pay whole of life premiums to cover inheritance tax liabilities.
Most people don’t have these policies choosing instead they take out the more cost effective “term insurance (see below), term insurance policies run for a set number of years.
This can be appropriate, for example, if the insurance is only needed to ensure mortgage payments – which end after 25 years typically – are met.
2) Term insurance
Term assurance, or term life insurance as it is also known, guarantees your family a payment if you die within a specific time period.
People often take out life insurance to cover substantial financial liabilities like a mortgage. Once the mortgage is paid off there may be no need take continue with life cover. That said family circumstance, like supporting elder children through university, could mean that you may consider taking out further cover.
This type of cover can also be called level-term assurance or insurance if the payout would be the same no matter when the policyholder died during the term.
3) Decreasing-term insurance (also known as mortgage life insurance)
An option for those buying term life insurance to cover a repayment mortgage is to have the potential pay out fall year after year in tandem with the declining balance of the mortgage.
Premiums will be lower than with normal term insurance.
4) Increasing-term insurance
Alternatively, you may wish to have your potential pay outs rise every year, perhaps to reflect increasing inflation. With an index-linked policy you can choose to link your pay out directly to an inflation measure.
Because the cover is scheduled to rise every year the premiums will be higher than for level-term and decreasing-term insurance.
5) Joint life insurance, payment on first death
If you are part of a couple, you could consider taking out a single policy that will pay out in the event of one of you dying. For instance if you are both working full time and you want to cover a mortgage liability then this type of policy can be cost effective compared to having two separate policies.
As circumstances change, for instance you start a family then you may want to consider taking further cover to provide security to the surviving partner and the family.
6) Death-in-service benefits
Many companies offer their staff’s families a lump-sum payment if the employee dies while they are employed by the firm and this should be considered when deciding how much life insurance cover you need.
However you must remember this cover may end as soon as you leave the company.