Critical illness

Critical illness (CI) policies pay out a tax-free lump sum on the diagnosis of a serious illness, enabling the policyholder to pay off debts such as a mortgage or invest to provide a regular income in the future. Once the payment is made, the policy ceases.

Most insurers set a minimum level of cover of £50,000, but as a rule of thumb you should consider at least insuring three or four times your annual income plus the value of any outstanding mortgages or loans.

Most CI policies cover a core of illnesses such as cancer, heart attacks, kidney failure, multiple sclerosis, burns, stroke and paralysis. Some of the more comprehensive policies offered by providers like Scottish Mutual or Scottish Provident also cover benign brain tumours, Aids, Hodgkin's disease, Parkinson's disease and loss of sight, speech, limbs or hearing.

Other illnesses may be covered by a total and permanent disability (TPD) clause if it can be shown that the policyholder can no longer perform a number of activities of daily living (ADLs) such as washing and dressing themselves.

Again the younger you are when you start the policy, the cheaper the premiums. New entrants to the market, such as Marks & Spencer, are considerably cheaper but cover is limited.

The cheapest way to buy CI cover is to add it to an existing life policy or endowment contract. Premiums are usually reviewed every five or ten years. The vast majority of CI claims are for heart attacks, cancer and strokes and some insurers, such as Abbey Life will cut premiums for policyholders who ask to be insured against just these three.

The choice can be difficult for those who can afford only one type of cover and it is sensible to consult a financial adviser experienced in health insurance. IFA Promotion, the lobby group that promotes independent advice, will recommend suitable advisers.

Advisers may also be useful if a claim is disputed. Insurers sometimes pay on borderline cases because they fear they would lose business from an adviser.