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Placing health above possessions

While 61 per cent of Britons take out travel insurance, just 35 per cent have a critical illness policy.

While 61 per cent of Britons take out travel insurance, just 35 per cent have a critical illness policy.

These are the results of a survey by protection insurance specialist Bright Grey that show the relatively low priority given to cover for serious illness that affects a significant proportion of the population during the course of their lives.

The diagnosis of a critical illness can have a major impact on individuals and their families. Whilst continual medical improvement means that the chances of survival are ever increasing, it is important to consider the financial impact of such an illness.

One of the best ways to safeguard against such an eventuality is to ensure that protection is put in place.

Critical illness cover is a long term insurance policy that pays out a tax-free lump sum on diagnosis of any of the illnesses covered by the plan. The financial consequences of such an illness make such provision a priority.

Many will suffer a loss of income or begin to incur greater costs due to their illness. The insurance company points to the fact that as well as existing outgoings such as mortgage payments, childcare costs and food bills, a diagnosis of this type could create additional financial pressures.

In spite of this it appears that for many people, critical illness cover is not a priority. With 93 per cent taking out home contents insurance, some people are more inclined to insure material possessions, rather than themselves and their families.

Protection against the effects of critical illness is not something that people should be delaying until they are older. Such illnesses can be diagnosed at any point in your life but younger people are liable to benefit from a much lower premium for the same amount of cover. There are also likely to be less pre-existing conditions that the provider will be unwilling to cover.

Whilst cost is likely to be a major consideration in the selection of a policy, your decision should not centre solely around which policy is the cheapest.

The provider will only pay a claim on diagnosis of one of the illnesses specified for cover in the plan literature. The range of ailments will vary between insurance companies and so care should be taken in this regard.

Guidelines from the Money Advice Service state that a policy should cover the following as a bare minimum: cancer, heart attack, stroke, multiple sclerosis, benign brain tumour and coronary artery bypass. These conditions are those that give rise to most claims.

A new feature of the critical illness market is the advent of severity-based cover.

Traditional policies will pay a tax-free lump sum on diagnosis of an illness and then cease. However a severity-based policy will pay out a proportion of the sum assured on diagnosis. The amount paid is dependent on how serious the condition is. The policy will then continue to pay out further amounts as the illness progresses.

The list of illnesses covered under a severity-based plan will generally be longer than one set up on a traditional basis.

If we take loss of sight as an example, a conventional plan will only pay a benefit if the life assured were to become completely blind.

However, a severity based plan will pay out a proportion of the sum assured for partial blindness. If the condition worsens the remainder of the sum assured will be paid.

A critical illness policy can be written with a choice of either guaranteed or reviewable premiums. Individuals that want the security of knowing that their payments will remain fixed throughout the term of their plan should opt for guaranteed premiums.

On the other hand a reviewable policy will have a lower level of premium in the plan’s initial stages.

However, the provider has the right to increase the level of payments over time in accordance with the age of the life assured, claims experience and prevailing medical costs.

There are other factors to consider. One of the main ones would be the choice of whether to set the plan up on a whole life basis or just for a specified term. Some providers will also offer the opportunity to exempt illnesses from cover in order to reduce the premium.

* Trevor Law is a director with Merito Financial Services, chartered financial planners, based in Solihull. E-mail: tilaw@meritofs.com   

 

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