Your money- Insurance survey: So the doctor's news is grim ...

Critical illness insurance can provide an immediate lump sum if a `dread disease' strikes. Nic Cicutti examines the types of cover
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The Independent Culture
Almost 700,000 people each year will be diagnosed as having cancer or suffer a stroke or a heart attack. None of this should surprise us - ask at any gathering of friends or family and everyone will know someone affected in this way.

What is perhaps less well known is how many people survive the onset of what is still called a "dread disease". About 77 per cent of people aged 35-54 who have a heart attack will live on for at least another five years.

Resuming work is another matter, coupled with the knowledge that statutory sick pay need only be paid by an employer for a brief period. Moreover, any benefits payable are likely to be worth only a fraction of what a person may have been earning before.

Critical illness (CI) insurance aims to remove this worry. It aims to pay a sizeable, tax-free lump sum on diagnosis of a specific life-threatening medical condition or if the policy-holder becomes disabled and unable to work again.

Unlike life assurance, which pays out a lump sum to dependants but only on a policyholders' death, CI cover helps the policyholder directly by being paid on immediate diagnosis of illness. The cash allows policyholders to pay for specialist treatment and equipment, while also providing reassurance that throughout the duration of a person's illness they need have no money worries.

Many who receive the money will use it to help pay off a mortgage, or to convalesce in relative luxury, perhaps abroad. Others, who may have a terminal illness but one which still gives them several years to live, may want to go on a long journey.

Since the mid-1980s, when it was imported from the United States, CI cover has become widely sold, especially when linked to mortgage protection policies. About a million people have some form of CI cover from the 60- plus insurers specialising in this field.

According to Standard Life, a mortgage represents a clear need for protection. The company points to the fact that many people adopt the attitude that it won't happen to them, and won't pay for cover as a standalone product. But when CI comes as part of a mortgage, they don't mind another small amount being added to the payment.

Other significant companies on the market include Legal & General, Swiss Life, Scottish Provident, and Norwich Union. All provide policies that give average cover of pounds 50,000-pounds 60,000 on diagnoses of such conditions as multiple sclerosis, kidney failure, heart disease and even CJD.

Legal & General premiums are among the best. A 30-year-old man wanting pounds 50,000 comprehensive cover for 25 years will pay a guaranteed premium of pounds 14.05 a month. Scottish Provident's rate is pounds 19.09.

While most critical illness policies cover more than 30 conditions, including loss of limbs or sight, and balloon angioplasty (a form of surgical intervention in which arteries are cleared by expanding them with a balloon), most claims are usually for heart attacks, cancer or strokes. As a result, policies exist which provide CI protection for just these three major illnesses, such as Abbey Life's Living Assurance Select.

While critical illness can help in times of urgent need, care is needed when selecting the policy. Roddy Kohn, an independent financial adviser at Bristol-based Kohn Cougar, says: "The key thing to ask is: what is the purpose of the policy? For a lot of young people it's knowing that the mortgage is going to be paid outright. Others may have different needs.

"For example, 95 per cent of claims are paid on notice of just seven claims, such heart attacks, stroke, MS, cancer, kidney failure and bypass surgery.

"But if you are a nurse in the NHS, in certain work situations you may feel that cover against accidentally contracting Aids is important.

"Equally, CJD is a growing phenomenon we still know little about. I would recommend taking out a policy which includes protection in that area.

"Also, there are large differences in price. You can have maximum cover with minimum premium by companies assuming that the companies investing your money will achieve 10 per cent growth rate, as long as you are prepared to accept your premiums going up after a few years. Alternatively, you can pay more if the company assumes a growth rate of 5 per cent, but the premiums will stay unchanged for longer.

"My advice is generally to go for the cheaper option because you don't know where you will be in 10 years' time. But that may not be suitable advice for everyone. It is always best to talk to an adviser to discuss your needs before taking out a policy."

Scottish Provident 0131 558 2740, Legal & General 0345 125626, Swiss Life 0345 228866. Details of local independent financial advisers: 0117 9711177.

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