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Medical insurance is nursed back to health

Petty exclusions that used to plague buyers of critical illness policies are being overhauled – and not before time – says Chiara Cavaglieri

Critical illness insurance may finally be shaking its poor reputation after the UK's largest insurer Aviva became the latest company to make improvements to its policies. Payout rates are on the up, which should give people more confidence, but you must still tread carefully to get the very best policy for your needs.

Critical illness cover is usually bundled together with a life policy and pays out a single tax-free lump sum if you are diagnosed with one of the conditions specifically defined in the policy. In the past insurers were tight-lipped about their claims statistics, which only fuelled accusations that they were wriggling out of claims too easily. However, the latest figures from the Association of British Insurers (ABI) show payout rates of 98 per cent on life insurance claims, 92 per cent for income protection claims and 91 per cent for critical illness.

Nevertheless, it is still very hard to wade through the definitions of what is and isn't covered. Policies vary in terms of what they cover but also in the definitions that can prevent claims – for example, a stroke that isn't "serious enough" or prostate cancer that isn't sufficiently aggressive.

Fortunately, many insurers have made significant improvements. Last week Aviva announced that new policies will have enhanced definitions of stroke and multiple sclerosis (MS) and additional payments of up to £20,000 for specific cancers and brain conditions that, without treatment, would be critical. If you suffer a stroke or are diagnosed with MS, you will now only need a definite diagnosis based on current symptoms; previously you were required to present continuous symptoms for three months.

Aviva's reforms show how complicated conditions can be. In July, for example, the insurer lowered the threshold for levels of the protein troponin that need to be met for a heart attack to be a valid claim. Aviva has also scrapped a restriction to its terminal illness benefit under which people have been unable to claim if diagnosed with a terminal condition in the last 18 months of their plan

Early-stage diagnosis of cancer has been one of the most contentious issues, and policies only used to cover advanced cancers. However, many insurers have now introduced partial, "severity-based" payouts, such as 25 per cent of the main sum assured for early detection of conditions that could lead to a more severe illness. Robert Morrison, Aviva's chief underwriter, says: "These additional payments mean the customer can receive financial support for conditions that wouldn't qualify for a full payment under the critical illness policy, but are serious enough to warrant some support."

With Aviva, customers can receive up to £20,000 without their cover or the sum assured being affected, so they will be to claim again later if they need to.

A typical life and critical illness policy for a 35-year-old non-smoker costs from £35 per month, according to the specialist broker Drewberry Insurance. However, this is a complicated type of product, so seek independent financial advice before making your choice.

The claims history of any insurer can speak volumes. Alan Lakey, director of the specialist adviser CIExpert, says Scottish Widows managed to sell the most critical illness policies in 2011 despite paying out on only 88 per cent of all claims, compared with over 95 per cent at Skandia Life. "The history should be scrutinised. It won't give you the whole picture but it certainly gives you some clues and Scottish Widows stands out from the crowd: it hasn't updated its policy for five years and really has fallen way behind," he says.

It may seem easier to buy a policy on the high street from your bank, but if that institution is affiliated to just one insurer, it will be pure luck if it turns out to be the right policy for you. The ABI does offer model definitions but a specialist adviser can talk you through specific conditions and restrictions and look at policies that are more likely to work for you in terms of your sex and age. Aviva says 93 per cent of its critical illness claims are made up of five conditions – cancer, heart attack, stroke, MS and benign brain tumour – but other core conditions to look out for include coronary artery bypass and heart valve replacement.

"Total permanent disability" (TPD) is an add-on feature in the insurance that you need to consider. The most comprehensive option is "own occupation" cover, for when sickness or injury mean you won't ever be able to do your own job again. With "any occupation" TPD cover, you would have to be unable to do any job whatsoever, making it harder to claim.

You should also discuss alternatives and complementary protection policies with your adviser. While critical illness pays a lump sum upon diagnosis, income protection pays a tax-free income in the event you cannot work because of factors such as stress, depression or a bad back. In an ideal world, they would complement each other but income protection is usually a priority because it lasts as long as you need it.

"Income protection is arguably a better alternative. It pays a tax-free income until you retire as long as you can't work," says Tom Conner, director of Drewberry. "The key issue here is to check the definition of being unable to work as there is not a list of conditions as there is with critical illness."

With any protection policy, you must never withhold important information about your health. Innocent non-disclosure of minor issues is not relevant, but the insurer will refuse your claim if it turns out that you failed to disclose something that would have led to the premium being increased or an exclusion being applied, such as a bad back.