Don't take the gamble with a critical illness

Others may not understand the term 'critical illness' whilst some think the premiums will be too high and surprised when they see the outstanding value.

Critical illness insurance pays out if you are unable to work through a serious health problem, such as cancer, multiple sclerosis or a stroke. Yet only 42 per cent of adults have such cover, which was launched as recently as 1983 in South Africa under the moniker 'dread disease insurance.'

In deciding on the amount of cover required, add up not only your outstanding mortgage and other loans but bills you either could not pay or struggle to in the event you were unable to work. You are protecting your lifestyle and should also look to the future such as not being able to continue to make pension provision.

A serious illness may mean you can never work again or carry out the job you were trained for. For those with children, apart from wanting to continue home life, there could be the cost of private schooling and/or help with later educational costs such as at university.

In 2008, the average cover was 90,863, down from 92,891 the year before.

Don't rely on the state. Treasury leaks ahead of this month's Spending Review suggest that incapacity benefit (which is to be replaced by an employment and support allowance) will become means-tested, saving up to 2bn a year.

Currently over 2.5m, who have paid national insurance contributions, claim the benefit which is 68-96 a week. Means-testing could affect 800,000 claimants on modest to high incomes.

It is all too easy to purchase a critical illness policy from the bank or building society offering your home loan but their rates are likely to be far higher than through a specialist provider with guidance from an independent financial adviser (IFA).

In deciding on your provider, discuss with an IFA:

who should be protected;

number of conditions covered;

amount of cover required;

claims record and reasons why declined.

The proportion of claims paid is rising with 90.5 per cent last year, up from 88.4 per cent in 2008, according to LifeSearch. Six years ago three-quarters of all claims were met.

In a LifeSearch's annual survey, Legal & General paid out the highest proportion of claims at 93.6 per cent, closely followed by AXA and Bright Grey (both 93 per cent). The worst in 2009 were Aegon and BUPA (88 per cent) and Aviva (89 per cent).

The main reasons for not paying out were the policy's definition of illness and non-disclosure of a previous health condition.

"We're in the business of paying claims and that should be the main purpose of any insurance provider," says Bernie Hickman, Managing Director of Protection at Legal & General. He said it was disappointing that they had to turn down 148 claims last year, adding: "We have worked tirelessly to combat non-disclosure. In an ideal world, no policyholder would ever have a claim declined."

Clearer application forms and tele-underwriting are helping but still point the need to have all your details checked by an expert.

Premiums are surprisingly modest for the insurance provided. For 100,000 cover, a 29-year-old male non-smoker on a 20-year term could expect to pay from 18.90-28.70 monthly, according to Moneyfacts research. For the same aged female, the rates are 19.90-29.60.

Rates for smokers on the same base are considerably higher: 29-54.60 for a male and 25.22-47.90. Despite inflation, these rates would stay static for the whole length of the policy.

Ask about the number of conditions covered. HSBC offer a 'serious illness' policy which pays out on only five conditions. By comparison, Bright Grey cover 35 illnesses and conditions. The cheapest premium may not offer a comprehensive product.

Cancer remains the most common cause of a critical illness claim at 64 per cent, says Aviva.

BUPA is the only major provider to include provision for type 1 diabetes.

If in doubt, ask for clarity of wording. For instance, some insurers exclude early-stage cancers even though a mastectomy is required.

Critical illness will not cover some conditions to be off work, such as stress, back pain or mental illness. If such cover is required, look instead for an 'income protection' plan.

In addition to contacting an IFA, it's a good idea to make a preliminary comparison on the website defaqto.com which offers star ratings, indicating the level and quality of cover available.

If one or more illnesses is excluded, owing to an earlier serious health problem, the premium should be cut. Reductions on this basis are offered for cancer and multiple sclerosis by AXA, Aviva, Fortis Life and Zurich and for cancer by Legal & General and LV= (formerly Liverpool Victoria).

Watch for policies which only pay out depending on the seriousness of the illness suffered. Some are certainly difficult to follow.

PruProtect's Serious Illness Cover lists 154 conditions with payouts ranging between 10 to 100 per cent of the sum assured, depending on the severity of illness.

Remember to review cover if your personal circumstances change, such as marriage, a birth, promotion or change of job. It's worth remembering that you don't have to be earning to need critical illness insurance.

"Everyone needs their own personal disaster fund – just in case the worst happens. Furthermore, we are living longer but not necessarily always in good health," warns Gerry Warner, Protection Growth and Market Manager at Zurich UK Life.

Many enjoy playing the National Lottery but are far more likely to suffer a serious illness than to ever win a big jackpot.

You are 4.6m times more likely to get cancer than to win the jackpot lottery payout and 18 times more likely to get cancer than win anything on the lottery.

Policy that proved vital

Debbie Renshaw, 47, pictured, decided to take out critical insurance in November 2006 to cover both her home loan and a commercial mortgage with her husband's website-graphic design business. She works both for him and a local authority legal department.

On the advice of her independent financial adviser, Adam Mitchell of Doncaster Financial Advice Centre, Debbie chose a Bright Grey policy at 69.92 a month. Bright Grey cover 35 illnesses and conditions and access to 24-hour helplines with advice from nurses who can arrange support services and counselling.

Four years earlier she had taken out a smaller policy through Adam with St James's Place, paying 19.35 monthly.

Sadly, in May 2007 Debbie was diagnosed with breast cancer. "I never considered I was critically ill," says Debbie, who mentioned the cancer in passing to Adam. He said this qualified her for payments under both policies.

Bright Grey, part of Royal London, paid 199,213 (including 1,892 interest) and St James's Place 37,700. Debbie had chemotherapy and radiotherapy and has now been given the all-clear.

"I would definitely recommend everyone takes out critical illness," says Debbie, whose husband, Lee, has a Bright Grey policy costing 29.65 monthly.

Debbie says Adam, as an experienced IFA, "always put a choice of financial providers". He is paid on a commission basis.