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A question offen asked is what is Critical Illness insurance (CI)? We can help you answer that question, Critical Illness insurance gives you a lump sum of cash if you contract a serious illness or suffer a debilitating affliction. The cash is paid tax free.
Why might I need Critical Illnes insurance?
Advances in medical know-how are making it possible for people to survive and even enjoy life during and after suffering a serious health setback such as a heart attack or a stroke. The number of people suffering such illnesses is not large, but still worrying.
Critical Illnes insurance comes into its own when you survive a serious illness but you are not well enough to earn your living. You will still have to pay the mortgage, household bills, for the car, and for enjoying yourself. In fact it's likely that your costs of living will increase because you may need some sort of nursing care. And you may have additional expenditure because you have to adapt your home to your new physical condition. For example, if you cannot work, you may need a wheelchair and a stairlift.
How easy is it to claim?
This depends on the insurer. AIDS related sicknesses, depressive illness and self inflicted injuries are most commonly excluded. The Alzheimer's, Parkinson's, and Motor Neurone diseases are also often excluded. However, heart attacks, cancers, kidney failure, multiple sclerosis are covered. You should also receive payment if you suffer a total and permanent disability.
How can I decide how much cover I need?
This will vary according to your commitments. If you are single and have no children you will need more modest cover than a married man with five children. It also depends on what other income you are likely to receive, say from a pension.
Tot up what your monthly expenses are, and then take away from that figure what your likely monthly income is likely to be. If expenses are greater than income you may be able to finance the gap using a CI policy.
It may also be an idea to increase premium payments to take account of future inflation. You can also get deals which cover married couples and children. Companies as well as individuals can protect themselves using this kind of insurance.
How is Critical Illnes insurance different from Permanent Health insurance (PHI)?
Critical Illnes insurance pays one lump sum. PHI pays a regular income. A Critical Illnes insurance cheque is usually paid once you have survived for 28 days after diagnosis of a serious illness irrespective of your actual abilities. If you make a full recovery the cash remains yours. PHI policies only pay out if you are unable to work and payment may only start after a six month wait, and then only last for a fixed period of time.
What are the traps to watch out for in the small print of Critical Insurance policies?
Check to see which illnesses are covered and which are not. Check to see if the terms of the policy change when you reach a certain age - perhaps 60 or 65. Also watch out for insurers which demand the right to increase premiums after a certain length of time.
Also remember that while any lump sum of money is paid free of income and capital gains tax, the 'pay out' will be added to your assets and so in the event of your death, your heirs may be liable for inheritance tax.
Are my rights to State benefits affected?
Yes and no. Some state benefits - like the State pension - is not 'means tested' so you would still be able to claim despite receiving cash from a CI policy. Qualification for other State benefits, however - like help with nursing home fees does depend on your financial situation.
On the whole, however, state benefits do little more than provide a safety net. If you want to maintain a higher standard of living you need to make private provision.
How much will it cost me?
Cost of critical illness insurance depends on how much money you want to receive if you are struck down. A common ceiling for benefits set by insurers is a total pay out of £150,000. The cost of cover also depends on how old you are, how long you want cover to run for, and your state of health at the start of the arrangement. Cost also depends on whether you are a man or a woman.
Cover is cheaper the younger you are, the longer you want cover to last, and the more healthy you are. You can shop around to get a CI policy to suit your circumstances. Premiums and cover do vary from insurer to insurer, so check before you buy and check the benefits in the vent of a claim to make sure you're comparing 'like with like'.
What happens if I want to cancel cover?
If you stop paying premiums you forfeit the right to receive a lump sum if you fall ill. Depending on who you buy the policy from you could get a small refund - but this will only be a fraction of premiums you have paid. CI is not an investment product, you are buying protection only. Some insurers will allow to take a payments holiday for limited periods if - for example - you remain healthy but are made redundant. However, if you chose this option premiums can increase and holiday periods can be short.
How do I know if a Critical Illness provider is kosher?
You should check that any company offering to sell you a CI policy is a member of the Personal Investment Authority, the regulatory body. You should also make sure that the insurer is authorised under the Policyholders Protection Act of 1975. This Act means you will be paid a valid claim even if the insurer goes bust. The Association of British Insurers can also offer guidance on the main insurance companies specialising in critical illness cover. So can your independent financial adviser.