Critical illness insurance – I’m healthy but I still need one?

critical illness insurance - i'm healthy but I still need one?

Deep down, most people would like to think that a serious illness only happens to other people. Unfortunately, the true picture is quite different, 25% of women and 20% of men will suffer from cancer or a heart attack before they reach retirement age. It’s time to consider critical illness insurance.

While by now insurance brokers have compelled us to consider what would happen to our families if we were to die prematurely, many of us are still in denial about the likelihood and effects of a critical illness. It can have a devastating emotional and financial impact: paying for expensive medical care, extra costs involved in adapting a home or travelling for hospital treatment, time away from work, lost income, possible death, and so on.

Critical Illness Cover, total Permanent Disability and Income Protection are also simply not on most people’s radars, this highly relevant type of protection is less commonly discussed and considered than life and health.

Critical illness insurance – what is it?

Critical illness insurance is similar to a Life Insurance policy, except that it pays out if you have been diagnosed with a serious illness such as cancer, heart attacks, stroke and so on, while you are still alive. The funds can be used to pay for medical treatment, to provide income protection for you and your family in case you cannot work, and to provide an inheritance if the worst does happen.

Total permanent disability (TPD) and income protection policies are related, and very similar types of insurance, so in this article we will treat them all as the same.

Why is critical illness insurance important?

Critical illness diagnoses are increasingly common. As life expectancies increase, and deaths from causes such as accidents, crimes and infections fall, the likelihood of developing one of these serious diseases is higher than ever. According to Cancer Research UK, one in three people will develop one of over 200 known types of cancer in their lifetime, and one in six is expected to have a stroke.

Statistically, you are more 5 times more likely to develop a critical illness than you are to die up to a certain age. Critical illnesses are an increasingly common cause of death, but even in worst-case scenarios, death could take several years. And on the bright side, medical advances have increased the likelihood of surviving what were once incurable ailments. In fact, nearly 40% of those who are diagnosed with cancer now survive for several years. Put together, this means that critical illness is a five times bigger risk than death.

Critical illness can have a devastating effect on your family and finances: a scenario in which the leading income-earner in a family is debilitated is, to be blunt, awful:

  • The leading income-earner is likely to be in a state of permanent total disability. In other words, incapable of working to maintain the family income.
  • Medical treatment could last for many years. Health insurance may not cover all of it up to the desired standard, co-participation payments can add up, and certain types of long-term care and extra expenses may not be covered. Put together with soaring global medical cost inflation, the expenses can be crippling.
  • The ability of family members to work and generate additional income may be hampered by the desire to care and spend time with their ailing loved ones.

Why is critical illness insurance an attractive type of protection?

In addition to providing protection critical illness insurance may be a good choice for you because:

The payout structure and covered risks are clear and straightforward.
While health insurance plans are an increasingly complex tangle of authorized procedures, reimbursements and regulation; critical illness cover is relatively simple: upon diagnosis of one of a specific list of illnesses, you receive a lump-sum, tax-free, cash payment. You can opt for traditional plans that pay a fixed amount regardless of the specific illness, or pay amounts that vary according to severity.

It can be relatively cheap.
Because of the straightforward structure and risks, insurance companies provide critical illness cover relatively cheaply.

You are less likely to be engaging in over-insurance or under-insurance.
Customers sometimes unfortunately are sold the wrong mix of life and health insurance. Young and healthy people might pay for an expensive health policy while they mostly use simple and inexpensive procedures that they could afford out of pocket. Others might think they are well-protected with their life and health policies, only to find out at a time of need that their health insurance is insufficient, and life insurance comes too late. By insuring specifically against the scenario in which you will be in most need, you can avoid these pitfalls.

Critical illness insurance – is it for me?

As mentioned above, critical illnesses are very common already and continue to rise. So a critical illness plan is almost certain to be a good option for you, regardless of your profile.

Critical illness plans are attractive for:

  • Those with no or few dependents, who don’t need very high life insurance coverage to provide an inheritance in case of death, but who wouldn’t have anyone to support and care for them, or would not want to burden their families in case of debilitating disease.
  • Healthy individuals who don’t usually use much medical care, but want to protect against serious and unforeseeable illness or total permanent disability. In this case, rather than pay for an expensive medical plan which provides sufficient cover in a critical situation, it might make sense to have a low-cost medical plan for routine checkups and small ailments such as fevers, sprained limbs and so on, and compensate with a substantial critical illness policy for the serious cases.
  • Those whose health insurance would likely not fully cover the costs of a debilitating disease. Even if you have both life and health insurance, consider the distressful scenario in which you have a debilitating illness that keeps you from work and requires expensive treatment and emotional support from your family for as many as 5 or 10 years. Would your health insurance and personal savings be sufficient to cover such a situation? If not, critical illness cover is the solution to fill in this gap.

In fact, the only scenario in which this insurance may be unnecessary is if you already have sufficient financial savings and health and life insurance cover to fully provide for you and your family’s needs throughout a worst-case scenario of prolonged illness, permanent total disability, expensive treatment and death. It can be a tricky calculation, and you might want to consult an insurance specialist or financial advisor to make sure you are fully covered.

Critical illness insurance – FAQs

How Does Critical Illness Insurance Work?

Critical illness insurance pays a lump-sum, tax-free, cash payment if you are diagnosed with and satisfy the survival period for any one of the critical illnesses covered by your policy.
Traditionally, critical illness plans pay out the full amount regardless of how serious your illness actually is. Some offer severity-based cover, where the payout depends on how bad your illness is. Provided you keep paying your premiums, you should be covered throughout the term. Once the policy term ends, all protection stops.

When you take out a policy you can decide how long it will last e.g. until your children have grown up, or until the mortgage is paid off. You can even set it to run for life. You can also usually choose the payout amount, with higher premiums payable for higher amounts.

Critical illness insurance is often available as an add-on with a life insurance policy.
When deciding on how much cover you need, think about what you would lose if you were unable to work due to illness. Also, think about what financial commitments you would still have, such as children or a mortgage.

What is total permanent disability (TPD) and income protection insurance, and what’s their relation to critical illness insurance?

These are all very similar types of insurance policy that may pay out in slightly different situations and with slightly different structures. While critical illness insurance pays out a lump-sum upon diagnosis of a serious illness, total permanent disability pays out upon any event that causes a worker to be unable to work, including an accident, for instance.

Income Protection is similar to TPD, but rather than pay out a lump-sum, provides a stream of continuous payments (a percentage of pre-disability income, for instance) for life.

What should I look out for in the fine print?

Critical Illness Cover pays out in case of specific diseases. The various ailments which we group under umbrella names like ‘Cancer’, ‘Stroke’ and so on are not in fact all the same. Different types of cancer vary in severity, the kind of treatment they require, and so on.

The insurance policies cover specific illnesses, according to technical medical definitions. While this coverage is not usually intended to be misleading, it can cause some confusion. For instance, certain types of early-stage tumours, which can be treated and are not considered to be critical, might be excluded, even though they may be considered ‘cancer’.

To avoid misunderstandings, it’s best to acquire these policies with the aid of an insurance specialist.

How Much Does Critical Illness Insurance Cost?

The cost for protection is based on your age when you apply, your health when you apply, your sex and whether you use tobacco products. Variables to consider are how long you need the cover to last, the level of insurance that is right for you and if you wish insurance to maintain its real value against inflation.


CHRIS LAND, FINANCIAL ADVISOR

Chris has 9 years’ experience as a UK pension specialist and licensed financial advisor. He specialises in helping clients make balanced financial decisions to grow their personal wealth.

Chris is licensed with Globaleye, an award-winning international financial advisory firm established in 1999, with 10 offices and 15,000 clients worldwide.


LEARN HOW TO GROW
WEALTHY

RELATED NEWS & INSIGHTS

6 tips to spot a bad financial advisor before it’s too late

Learn how to spot a bad financial advisor before it's too late with 6 tips from certified financial advisors sharing their past experience.

Property Market – What are the best opportunities?

On any given day you can read forecasts from prestigious economists about what direction the property market is going in, but should you trust them?