Cover can bring peace of mind should a critical illness strike

Whilst 39 per cent of adults have life cover, an amazingly low 12 per cent are protected by critical illness insurance. Cover for mobile telephones, homes and pets is far more likely.

Mark Jones, head of protection at LV=, formerly known as Liverpool Victoria, says: “Far too many clients adopt the ostrich position when it comes to the subject of protection, subscribing to the belief that they will never fall ill and become unable to work.”

Yet, according to research by LV=, 22 million adults have others who depend on them financially for everyday needs such as food and housing. The more who depend on one person, the greater the need to insure them.

Critical illness (known as CI) cover pays out a lump sum if the life insured either dies or is diagnosed with a condition that meets the insurance company’s definition.

The first policies were written almost 30 years ago in South Africa under the awful title ‘dread disease insurance’. Whilst high earners usually purchase to an appropriately upper level, it is probably low income families which most need such cover as they are likely to be poorly prepared to deal with the financial effects of ill health.

When considering the most appropriate policy and provider, ideally through an experienced independent financial adviser, look particularly at:

n how comprehensive is the range of illnesses;

n if payment can be staged so that help is available immediately after diagnosis;

n percentage of claims paid;

n history of increasing premiums or reducing payouts.

Providers have been criticised in the past for the limited range of conditions they covered but this has largely been addressed in recent years.

When selecting your provider, check how flexible they are on paying at an early stage when illness is diagnosed. Those who suffer breast and prostate cancer, for instance, can now receive much needed financial help when they are ill even though the level of severity does not yet qualify for a full payout.

The level of non-payment – allegedly one in five – was worrying but this is now down to a very low percentage as applicants have become more open about disclosing their past medical history.

This is why a good IFA’s helping hand is vital.

Ensure the person is insured for their specific occupation rather than an ability to undertake ‘work tasks’. In one insurer’s case, the claimant needed surgery to remove his oesophagus and tumour on the spine, requiring 24-hour care. Yet a CI payment when cancer was diagnosed was initially refused as the claimant was judged not ill enough to claim.

‘Own occupation’ is not available with Forester Life or NFU Mutual, both of whom offer an alternative basis.

Tele-underwriting has also helped to reduce misunderstandings on medical history. “Consumers who discuss health details over the phone with a nurse or member of the insurer’s underwriting staff are far less likely to omit relevant facts,” say Scottish Provident.

Do not put off a decision as higher premiums are highly likely, following an EU gender directive. Insurance policies here are currently priced according to the specific risk of morbidity and ill health each gender presents. This means the highest rates for women are when they are in their 30s and 40s whilst men pay most when younger and older.

From December 21, the risk has to be pooled for a unisex price. Insurance insiders say the coming months will effectively be sale time for critical illness and other life protection products.

When selecting a CI provider, ask how long they will guarantee a premium for a fixed payout. In an increasing number of cases, after a few years of underwriting, insurance companies give three options: to continue to pay the same premium but accept a reduced CI sum assured, to raise the premium to maintain the same level of cover, or do nothing in which case the size of the premium later is likely to be far higher or the cut in any potential payout disappointing.

Most CI policies are regular, meaning usually monthly or annual premium payments, but a small number are single payments which might cover a specific year or several years. The Association of British Insurers says 421,000 regular CI policies were in force in 2009, the last year for which figures are available, and just 9,000 on a single premium basis.

This meant that for £229m premiums paid, the maximum benefits insured annually amounted to £49.5m.

Owing to different interpretations, the association has produced helpful standard definitions for the industry. Some insurers have taken this opportunity to extend the wording. Aviva, formerly known as Norwich Union, have done this for cancer, Alzheimer’s disease, major organ transplant, Parkinson’s disease and motor neurone disease.

The range that CI will cover is also increasing. Examples include significant visual impairment, removal of an eyeball and Crohn’s disease with intestinal resection.

According to Investment Life & Pensions Moneyfacts, additional CI conditions beyond the association’s model range are notably offered by the AA (13), Aegon (15), Bright Grey (22), Friends Life (23), Legal & General (16), LV= (25), Saga (16), Sainsbury’s Bank (16), Scottish Provident (22) and Zurich Assurance (17).

Consider CI for all members of the family. Many new policies include cover for children for up to £25,000. If a claim for a youngster is made, the policy continues in force for other members of the family.

CI policies vary widely in the maximum age accepted. Whilst a few are as low as 65 years (Forester Life) and several stipulate 70 (AA, Bright Grey for guaranteed, Friends Life, Legal & General, Saga), some rise to 84 (Aegon), 85 (Scottish Provident) and even 90 (Aviva on a reviewable policy).

A few insurance companies require a policy to run for at least five years (AA, Aegon, Forester Life, Friends Life, LV=, NFU Mutual, Scottish Provident) but some have no minimum stipulated period (Barclays Life, Lutine Assurance, Police Mutual Assurance, Post Office, Scottish Friendly, Skandia).

Combining CI with level term assurance (which pays out on death), annual premiums can be as low as £50 (Aviva, Sainsbury’s Bank, Zurich Assurance), which shows how competitive such protection has become.