Money: How to take cover for when life goes critical

You can ease the financial pain of a life-threatening illness, writes Simon Read
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Critical illness insurance is a comparatively recent addition to the range of health and medical insurance policies. Insurance companies and new entrants to the market, such as Virgin Direct and Marks & Spencer, are lining up to sell it.

It's easy to assume, therefore, that critical illness insurance is just another marketing whizz to grab more money from policyholders. But to do so would be something of a misunderstanding of what these policies offer.

Critical illness insurance is entirely different from permanent health insurance (PHI). PHI is an income replacement insurance, paying out if you suffer an illness and can't work, but critical illness pays out a lump sum if you contract certain specified illnesses or diseases, regardless of income.

"PHI is not concerned with what is wrong with you, but whether you are able to do your job," says Martha Catterall of City Independent Financial Planning. "Critical illness cover is not concerned about whether you can work, but whether you are suffering from a specified condition." Conditions covered include serious illnesses such as cancer, heart disease and other life-threatening diseases. "The other obvious difference is that critical illness cover pays out a tax-free cash lump sum while PHI pays a reduced tax-free monthly income," says Ms Catterall.

Effectively, the aim of the insurance is to pay out for the medical costs associated with getting a serious illness, such as specialist healthcare, modifications to your home, round-the-clock nursing care and so on.

Some of the growth in critical illness insurance has reflected advances in medical research that have improved the chances of surviving longer after a serious illness. Two-fifths of diagnosed cancer sufferers aged 35-54, for example, will survive for at least three years, according to the Cancer Research Campaign.

Statistics show that one in four men and one in five women will contract a critical illness. Compare that to the chances of winning the Lottery of just one in 14 million. Yet millions of us hand over our cash every week for a lottery ticket.

The pay-out from a critical illness policy can be used for any purpose. "The money gives you the opportunity to make your own financial arrangements," says Vivienne Starkey, an independent financial adviser with Haddock Porter Williams. "You could repay your mortgage or clear other debts, adapt your home if necessary to cope with a disability, pay for care, or simply blow the lot on a wonderful holiday."

It sounds a sensible deal, but the drawback is the expense. Because the chances of contracting a serious illness are quite high, the cost of cover is equally high. For a pay-out of pounds 100,000, for instance, monthly premiums on a fully-comprehensive plan would be about pounds 25 a month for a 30-year-old man for a lifetime policy. A five- or 10-year policy would be cheaper.

The level of cover you require will largely determine the premiums. Age is also a relevant factor and smokers are heavily penalised, with a 50- year-old smoker having to pay twice as much as a non-smoker.

What is covered? Most policies cover heart attack, total disability, stroke, cancer, major organ transplant, coronary heart by-pass surgery, kidney failure, paralysis or loss of limbs, Alzheimer's disease and multiple sclerosis.

By shopping around you may discover policies which offer more. AXA Equity & Law's comprehensive Lifecare policy, for example, also includes aorta surgery, benign brain tumour, blindness, kidney failure, deafness, loss of speech, major burns and Parkinson's disease.

Aids is excluded with most policies, while other diseases generally excluded include brain damage and emphysema.

So, should you take out this type of medical insurance? "On the face of it, critical illness cover is attractive as it pays out cash when you are diagnosed, even if you can carry on working," says Brian Dennehy, an independent financial adviser with Chislehurst-based Dennehy Weller & Co. "But it only pays a lump sum. In contrast, PHI will start paying out on almost any illness which stops you working. If you have a long period off work, the total potential sum from PHI can be much higher than from critical illness cover.

"PHI, the income replacement cover, will even continue paying out, if necessary, until you reach retirement age, which could be long after a lump sum has gone. It's a question of identifying where you are most vulnerable and choosing the appropriate product."

Costs can be cut by taking out a simple plan which only offers cover for certain illnesses. "It's also very cheap to add critical illness cover to an endowment for anyone taking out an endowment mortgage," says Ms Catterall.

For both Critical Illness insurance and PHI, it is worth taking professional advice before you buy. It is also worth reading up on the subject. For a basic, simple and free guide to these medical insurances, obtain a copy of NatWest's "Guide to Financial Protection During Illness" (tel: 0800 255 200).