Slow drip of price rises now a flood

One of the leading providers of insurance against serious medical conditions this week announced its third hike in premiums in eight months - and other providers are set to increase their prices in the coming weeks.

This is a growing reason to tread very carefully when buying critical illness (CI) cover. CI policies usually pay out a tax-free lump sum if you are diagnosed with one of a list of illnesses or conditions such as a heart attack, stroke, most types of cancer or kidney failure, or have to undergo certain types of surgery. It is often sold to people when they take out a mortgage.

It's one of the fastest-growing financial products - 1.2m policies were sold last year alone - despite the fact that CI cover can be expensive, not appropriate for everyone and contain small-print catches and exclusions.

But a surge in claims made on these policies and advances in medical science mean things are currently moving very quickly in the world of critical illness insurance. Experts say it may not be long before CI cover as we know it is gone for good.

This is partly because insurers have been rattled by a rise in cases where CI policyholders who have perhaps had a minor form of non-invasive cancer that maybe hasn't required them to have any time off work, have received large pay-outs.

In some cases people haven't even needed medical treatment for their condition, "yet on some older definitions the policy has to pay out," says Kevin Carr at specialist life insurance broker LifeSearch (www.lifesearch.com).

Insurers say CI cover is all about protecting against serious life-threatening illnesses that could have a long-term impact on people's ability to work or their standard of living.

Some have tightened up on their definitions and added exclusions. Men diagnosed with prostate cancer can often make a quick recovery after treatment, and with some new policies, only advanced stages of the disease will now be covered.

Norwich Union this week said its new premiums for CI cover will rise from Monday. Premiums for mortgage-linked life insurance with critical illness cover included will rise by an average of 12%. So a non-smoking homebuyer couple in their mid-30s looking for £100,000 of cover over 25 years will typically pay £50.52 a month for mortgage life insurance with CI included, from next week. If they had signed up this week, the cost would have been £45.09 a month.

For term assurance with CI cover included, the rise is a lot less - around 1%.

Existing policies are not affected by the announcement.

This is the third time since December 1 that Norwich Union has raised its new premiums. It's not the only insurer to have whacked its prices up - many of the others such as Prudential, Legal & General and Scottish Equitable have also announced several premium hikes.

There are two main types of critical illness policy. With guaranteed policies, the amount you pay is fixed for the life of the contract. And then there are "reviewable" policies where what you pay typically changes (ie, probably goes up) every five years.

The Norwich Union premiums quoted above are guaranteed. Guaranteed policies are generally seen as a better bet because, as with fixed-rate mortgages, you know your payments won't shoot up.

Reviewable premiums will probably be cheaper in the short term - for example, that quote of £50.52 a month above would fall to £43.92 if you took Norwich Union's combined policy on a reviewable basis - but over time it is likely they will be more expensive, says Mr Carr. "We recommend guaranteed [policies] nine times out of 10," he adds.

However, some insurers, including the Pru and Scottish Equitable, have pulled out of offering guaranteed policies completely, and Norwich Union said this week that people will no longer be able to buy stand-alone CI policies on a guaranteed basis (most people buy critical illness combined with life insurance).

Halifax, Nationwide and Direct Line are among other providers that do not offer guaranteed policies. Meanwhile, in the past month two providers, Swiss Life and Zurich Life, have stopped taking on new customers. And early next month, Scottish Widows is due to announce a hike in its new reviewable premiums.

Perhaps most worrying of all, we are starting to see reviewable definitions for illnesses coming in - which means that if an illness were to become curable in the future, a company could simply knock it off the list. A company called New Direction Finance (NDF) is thought to be the first to bring in these reviewable definitions.

But whether you actually need critical illness insurance is a different matter. For many people with a family, life cover is going to be the priority.

For some, accident, sickness and unemployment cover (aka mortgage payment protection insurance) will be a better bet. This covers your mortgage payments if you become unemployed or can't work owing to an accident or illness.

If it's a couple, both of whom are working, they may take the view that they could manage if they had to on one salary. And if you've got well-off parents, they may be able to bail you out if you were struck down by a nasty illness.

If you do decide CI cover is what you need, get several quotes and check what is and isn't covered. Despite their premium increases, specialist IFAs say that Norwich Union and L&G tend to be among the most competitive guaranteed policy providers.