Q&A: Critical illness insurance

Grim stories about the rising incidences of cancer among younger people has led to renewed interest in critical illness insurance, but what is it and do you need it?

What is it?

Critical illness cover pays out a tax free lump sum if you contract one of a list of diseases. Many people use the money they receive to pay off their mortgage. Or, you might want to adapt your home or spend the money on paying for a carer.

What is covered?

There are a range of core diseases common in all policies. These are cancer, heart bypass surgery, a heart attack, kidney failure, a major organ transplant, multiple sclerosis and a stroke.

Some policies contain a far longer list - they may not necessarily be the best on the market. Total permanent disability is an important condition to be covered, however.

What are the major catches to be aware of?

It's best to buy a policy that has an "own occupation" definition under total permanent disability. Some policies have an "any occupation" definition, which means you could be required to take up a different job if you become ill rather than receive a pay out.

What are the exclusions?

These vary too. Aids, mental illness and self inflicted injuries are most commonly excluded, as are Alzheimer's, Parkinson's, and Motor Neuron disease.

What are the different types of policies?

You can buy policies that are either stand alone or combined with life cover or a mortgage endowment. Often a combined policy works out cheaper than buying separately, but the payout is usually based on an either/or situation. In other words, if the policy pays out for a critical illness, you will no longer be covered by the life insurance element.

Do you need it?

Insurance companies are awash with figures stating how likely you are to need this insurance.

Yet government figures also back this up. They show a long absence from work due to illness is 10 times greater than the chance of dying before retirement.

One in three people will develop cancer, according to Cancer Research UK, and according to the British Heart Foundation someone suffers a heart attack every two minutes.

Who do I buy critical illness cover from?

There are a vast number of insurers offering this product and the market is expanding.

Critical illness needs can be complicated and if you're not sure what type of policy would best suit your needs, see an independent financial adviser who specialises in protection. Contact IFA Promotion for details on 0117 971 1177 or look at their website.

Buying critical illness insurance from your mortgage lender is not always a good idea. They often earn high commissions and it's likely you'll pay over the odds for worse cover.

If you know what you want, then you may find reduced prices through telephone and internet brokers, such as Lifesearch.

How much will I pay?

Premiums depend on age, gender and the amount you want to be insured for. As with life cover, the older you are the greater the risk, so the more expensive the policy.

A 30-year-old woman can expect to pay more than a man of the same age due to a higher risk of cancer.

But the premium differences between the sexes lessen in later life, when the man's risk of a heart attack rises.

Occupation also counts - an office worker, for example, pays less than a manual worker.