Last updated on August 8th, 2022 at 03:57 pm
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Life insurance is about leaving money behind so your loved ones do not suffer when you pass away. Critical illness is designed to help you protect your loved ones from financial suffering if you’re ever seriously ill.
If you’re reading this article you probably already know the benefits of critical illness cover, but you’re not yet sure how much critical illness cover you need.
Let’s start by saying critical illness is more expensive than life cover and the reason is simple. You are much more likely to claim on critical illness insurance, but more on that later.
Choosing an amount of cover that suits your needs may result in a monthly premium that exceeds what’s realistic when you consider your other financial commitments. So we’ve compiled a few pointers to help you decide how much cover you really need.
A critical illness insurance policy is designed to pay out a lump-sum if you are diagnosed with an specified illness during the policy term.
Let’s clear up few bits of jargon to help:
Receiving a lump sum if you are diagnosed with a life-changing illness can ensure you and your family have one less thing to worry about. It’s a form of financial security that will give you options and lessen any financial impact on your family.
You may need to grab a calculator to help with this question. To effectively work out the true impact of a critical illness diagnosis there’s a number of factors to consider.
Start by adding up:
Adding all of this up is not easy, but give it a go. It’s surprising how fast it adds up.
Once you know what you’d need to cover, and you’ve added it all up, then consider if:
Once you’ve completed this exercise, you should have a rough idea of your “ideal” cover level. If you’re still in doubt, it may be worth speaking to a non-advised, fee-free whole of market[1] broker. Being “non advised” means the broker is compelled to listen to your needs, explain all of your options and let you decide what’s best.
Often our level of cover will need to align with our monthly budget. If you decide to speak to a broker, they can help you find an exact level of cover that’s affordable.
You need to consider how badly a critical illness would impact you financially. What support could you rely on? Wether you’re single or have lots of people that financially depend on you, critical illness could be a good fit. It’s important to ensure that any cover level you choose is realistically affordable for the long term. It makes no sense to over commit yourself financially and then end up cancelling your protection.
The price depends on a number of factors. Your age when you take cover, how long you take it for, how much cover you want, your medical history (including pre-existing medical conditions), lifestyle, smoking or vaping, BMI and cover type all have an effect.
Speaking to a financial advisor or broker will give you the opportunity to compare different policy types and different insurance companies.
To help give you a ballpark figure, we’ve included an illustration of some quotes below*:
| Amount | Cover | Term | Basis | Premium |
| £250,000 | Life Only | 25 Years | Level | £10.89 |
| £250,000 | Critical Illness | 25 Years | Level | £112.79 |
| £250,000 | Life + Critical Illness | 25 Years | Level | £115.18 |
*Quotes generated using Iress on 30/06/2021 for a male non-smoker who is 33 years old.
You’ll note that the life and critical illness quote is over ten times the amount of life cover alone. While that may look expensive, it illustrates how much more likely you are to claim on critical illness than life insurance alone.
A broker can tailor make a policy for you. For example, if you need £250k to cover your mortgage but you only want £25k of Critical Illness they can do this.
Many people believe it’s better to have some cover than no cover. Imagine if you had to have a year off work. £25,000 may pay the mortgage and bills for that period. It could give you a well-deserved break and help you recover.
Critical illness cover will not cover a sniffle or a week off work. It’s designed for the type of diagnosis’s that could have a lasting or long term impact on your life. You may choose to consider savings or income protection cover for shorter term non critical illnesses.
Often income protection is compared to critical illness insurance. Both are very different insurances but arguably some parts of the products work in similar ways. Income protection tends to be a more expensive option but instead of providing a lump sum it pays you a monthly income. It also usually has a waiting period before you can make a claim (between 1 to 12 months). Income protection policies also have a limit on how long they’ll pay out for (2 years to retirement).
Both types of policy provide different levels of protection. There are pros and cons to critical illness, just like any form of protection. [2]
There are two ways you can buy critical illness cover with a life insurance policy:
Accelerated cover is the cheapest and most common form of critical illness. If you claim on the critical illness element your life cover will cease too. You may struggle to buy new life insurance after a critical illness so it’s worth considering what you may do with the payment and if you may need some additional life insurance.
A far lesser known option than accelerated. Additional cover is exactly what it says on the tin. If you claim for a critical illness, then you’ll still have the same value left to claim on again for life cover.
It’s common for people to have an accelerated policy with different amounts of life and critical illness. For example, you could have £250,000 of mortgage life insurance with £10,000 of critical illness. Although, if the critical illness is accelerated, the life cover may not cover the mortgage if you need to claim on the critical illness. Here it could make sense to either increase the amount of cover, take a standalone life and critical illness policy of change the critical illness element to “additional”.
Always ensure your broker or life insurance adviser clearly explains what happens to your life insurance sum assured if you claim on the critical illness.
A few insurance companies also offer a service called “buy back”. With this option you can choose to re-purchase any lost life insurance because of a critical illness claim. The advantage is your cover is guaranteed (subject to the insurers typical terms) which means there won’t be any further medical underwriting. They will simply base the price upon your age and your health when you first took your policy.
No. Terminal illness benefit is typically something that comes with a life insurance or criticial illness policy. Unlike critical illness insurance, terminal illness will only payout if a doctor gives you less than 12 or 18 months to live. This benefit then gives you the option of claiming your life insurance early (while you’re still alive). Alternatively, critical illness pays out a lump sum on diagnosis of a condition even if there’s a chance of you surviving the illness. [3]
Most insurers now offer children’s critical illness cover. Some offer it as a paid option, while others include it for no additional cost. Typically, insurers will payout a lump sum equal to a set percentage of your critical illness up to a capped amount. For instance, at the time of writing this is 50% of the value of your policy or £25,000 (whichever is lower) for Aviva policy holders.
Children’s conditions often vary a little to the ones adults are insured for. Always check your documents carefully to ensure you know exactly what you’re paying for. Your insurance company may also include an additional payout for children’s funerals.
Any payments made for children’s critical illness are not normally taken out of the insured amount for the adult. This means that if you should have to make a claim and you could then make a further claim in the future, for yourself.
All insurers have their own list of specified illnesses and illness definitions that they will payout for. The vast majority of claims are for Cancer, Heart Attacks and Strokes. Multiple Sclerosis also makes up a large percentage of young adult claims.
Insurance companies may cover other medical conditions, such as:
In recent years some insurers have battled to grab headlines for insuring the highest number of critical illnesses. Sensibly insurers are now working towards simplifying their policies and ensuring they are adding the right value for customer.
The Association of British Insurers (ABI) set out minimum standards for critical illness definitions. When you read insurer documentation, you’ll notice they mark some conditions as “ABI” meaning they at least meet the ABI definition. Insurers can extend their definition to a more generous level, which the ABI classifies as ABI+.
If you carefully read this documentation, you’ll notice subtle differences between insurers. Try to not get too bogged down in the quantity of illnesses covered. The vast majority of claims are for the top 3 or 4 mentioned above [4].
90%+ of critical illness insurance claims are paid out. Claims that are declined are typically as a result of non-disclosure. This happens when you accidentally or deliberately misinform an insurer about your health or lifestyle during the application process.
In 2012, the Consumer Insurance (Disclosure and Representations) Act was passed. Since this point it has been the insurers responsibility to ask the questions they need to appropriately underwrite a policy. Providing you answer all of their questions accurately and carefully, the only reaon your policy would not pay out would be if you were to claim for something that does not meet your insurers illness defention.
Sometimes it’s easier to jot down your pre-existing conditions and medication before speaking to a critical illness expert.
It’s important to note, you must keep up your monthly payments until your claim is accepted. Failure to do so may invalidate your claim. Ask your broker to explain “Waiver of premium” if you are concerned with keeping up your payments due to illness or injury.
When you claim on your critical illness policy, you will receive a tax-free lump sum[5]. If you’ve chosen an accelerated policy, then your payments and cover will end. Alternatively, if you’ve chosen an additional cover policy, then your premiums will continue for the life insurance element of your cover.
If you’ve chosen a “buy back” option, there is usually a period you need to wait before they will offer your life cover back to you.
Check out our Ultimate Guide to Life Insurance for more information on Life Insurance.
[1] Protect Line use a panel of insurers to help you to find cover that is suitable for your needs. Protect Line may not have access to all insurers on the market. Protect Line can only offer you prices from insurers on their panel.
[2] Protect Line do not offer any advice on any product. Income protection may be suitable for your needs. If you are unsure of what product may suit you best, please seek financial advice.
[3] Terminal Illness benefit is often included with both life insurance and critical illness policies. Please read your documentation carefully to ensure you know what you are covered for.
[4] Claim Stats from Legal and General in 2020 shows the top 3 conditions as: Cancer-64%, Heart Related-13%, Stroke-7%. 84% of claims paid in 2020 were for these 3 conditions. https://www.legalandgeneral.com/landg-assets/adviser/files/protection/_resources/documents/critical-illness/ci-guide-w13802.pdf
[5] HMRC do not currently treat Critical illness payouts as income (https://www.gov.uk/hmrc-internal-manuals/insurance-policyholder-taxation-manual/iptm6010). If you pass away before spending your payout it will form part of your estate and will be taxed accordingly. Taxation policies change from time to time. Please refer any taxation questions to a qualified accountant or to the HRMC.
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