Conal Gregory: One million workers that prove critical illness insurance is vital

Staff in one of the regions critical care units caring for extremely ill patients.
Staff in one of the regions critical care units caring for extremely ill patients.
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Looking after your family and ensuring your own lifestyle in the event you suffer a critical illness should be an insurance priority. Yet millions ignore such a sensible approach.

For over 30 years critical illness has provided financial stability for so many who would otherwise have struggled to cope. Perhaps it would appeal more if it was known that such cover was the brainchild of a health professional and not an insurance company.

The South African cardiac surgeon Dr Marius Barnard saw at first hand the financial hardship experienced by his patients and their families after surviving a critical illness, which made him realise a new form of insurance was required.

Unlike term cover, which pays out on death, critical illness (CI) insurance pays once the diagnosis of a specified serious illness is made. Since the initial days, cover has extended to include children and a helpful variation where there is a reduced payment for a less serious form of an illness but a full one for a more critical type.

Whilst many employers have schemes to help with CI, the length and severity may mean separate cover is required. It is particularly important for those who are self-employed. At a time when household budgets are under intense pressure, such premiums should be seen as a necessity, not a luxury.

The Association of British Insurers reveals that every year around one million workers unexpectedly find themselves unable to work through injury or illness.

“Leading policies will cover between 30 and 100 critical conditions but insurers tend to define these conditions differently and to pay out at different points in the process, so make sure you know what you are buying,” advises Tom Conner, director of Drewberry Insurance.

The top reasons for claiming are cancer, heart attack, stroke, multiple sclerosis and benign brain tumour with 45 years the average age for a claimant.

Whilst some insurers list a fantastic number of conditions, many rare, this adds unnecessary complexity to CI. Jennifer Gilchrist at Royal London has suggested that providers should concentrate on those areas where most claims are received, revealing that nearly 90 per cent of its claims are for just five definitions.

Alternatively, perhaps insurers could provide a simple product covering the three most common reasons for claiming combined with income protection. With only 272,000 standalone CI policies nationally – but 11.7m term ones – such a way forward deserves consideration.

The lump sum paid, both for CI and term, is free from income tax. In order that the money does not form part of your estate for IHT purposes, ensure the policy is written in trust.

The financial help is not only to adapt a home and perhaps transport to accommodate CI but to repay debt, such as a car loan, and mortgage. If a repayment mortgage is in place, check that it does not already have decreasing term assurance which means the protection reduces with the sum outstanding.

It is important to use an experienced independent broker who can guide as to the most appropriate insurer. When seeking a quotation, it is vital that your full medical history is given as an omission can invalidate a claim. “Buying cover while you are healthy helps ensure you get the most comprehensive cover at the most affordable price,” says Keith Richards, Personal Finance Society chief executive.

The average CI claim is £66,186 and a surprisingly low £53,790 for term. The proportion of authorised claims is rising with just 80 per cent for CI in 2005 and now 93.1 per cent.

Ask a broker for the payout rates of the likely insurers. One tip is to combine CI with term cover to reduce costs. A lower premium is offered by some insurers for a policy with fewer conditions covered.

Conner says that whilst couples can take out joint term cover, “it may not be the best option”. This is because once a claim has been effected, it leaves the remaining partner without insurance and they can struggle to find new cover on competitive terms as they will be older and may have developed medical problems in the interim. Although two separate policies may be marginally more expensive, he says: “Our clients often find securing two payouts is well worth it.”

Rating is based on occupation. A standard rate, for instance, is unlikely to apply to a tree surgeon who works regularly at a 15m height.

Term assurance is taken out primarily to provide a lump sum. Like a CI payout, it is free of income tax. Sean McCann of NFU Mutual, who use AIG Life to underwrite policies, says some term providers will pay out early if there is a diagnosis of death within 12 months.

The money paid with term is to help your dependants maintain their lifestyle. A recent variation to a lump sum is a ‘family income’ policy which will contribute annually for an agreed period.

Partners or shareholders in a firm should each take out term assurance on their own lives in trust to the others. If they die, the payment will help the surviving business owners purchase the deceased’s share of the firm from their family. If an employee’s death could cause a loss of profits, ‘key person’ cover should be bought.

Term protection is not restricted to yourself. Cover can be taken out on anyone whose death may leave you financially worse off, such as a divorcee who is reliant on maintenance payments from their ex-spouse or civil partner.

If the insured person does not die, no payment is made under a term scheme. However, often such a policy is taken out to help pay inheritance tax so that the family do not have to sell assets such as the family home. They are also used when a business or farm is left to one child with a wish to provide a lump sum for the other non-business inheriting children.

“The cheapest plan is rarely the best so it is usually worth doing a bit of shopping around or speaking to an expert broker,” says Emma Thomson, head of customer care at LifeSearch.

According to analysis by Moneyfacts, combining CI and £100,000 term cover for a non-smoker aged 40 next birthday for 20 years costs £46.43 monthly on average. The lowest premium is £41.12 with AA Insurance Services and highest at £60.30 with Forester Life. On the same level single life basis but for 10 years, the average falls to £37.34 with the lowest £32.88 (LV=) and highest £46.06 (Forester Life), all monthly.

On the same basis, a smoker on average would pay £67.95 and £52.01 for 20 and 10-year policies respectively.

CASE STUDY:

Fiona Young and partner Craig Moon, both 26 years old, decided to buy both critical illness and term insurance protection last year. “With both parents having cancer, we decided to take out this protection when we bought a home together in September,” says Fiona.

“You don’t know what’s round the corner and our entire savings could be lost,” says Fiona.

The couple were recommended to a specialist, LifeSearch. From all the insurers checked, LV= was chosen for a 35-year policy to cover the length of the mortgage. The monthly premium is £23.78.