Critical illness insurance explained

What is critical illness cover?

If you're diagnosed with a critical illness, it can have a severe impact on your finances as you may need to take time off work for your treatment and recovery.

Critical illness insurance is designed to help with financial burdens – it pays out a lump sum payment when you're diagnosed with one of the specific conditions covered by your policy.

It's slightly different to income protection insurance, which covers a wider range of incidents and life insurance, which pays out to your family if you die.

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Find out more about the different types of life insurance.

How does critical illness insurance work?

Critical illness cover is usually sold alongside a life insurance policy such as  term life insurance. The structure of the two types of cover are quite similar.

When taking out critical illness cover, you'll need to work out how much cover you need and how long you want the policy to run for. For example, you might calculate you need £100,000 of cover, to run for a 30-year term.

It's a good idea to sit down with a financial adviser and work out what sort of sums your family would need to live comfortably if you developed a serious illness and were no longer able to work.

You could arrange cover so:

• Your mortgage balance is cleared.
• Other existing debts are paid.
• Your household bills are covered.
• Any new medical treatment costs are accounted for.
• You can not work for several months or years during a period of convalescence.

You can select whether you want the cover to increase over the course of the term, so that it keeps pace with inflation. Or, if your main concern is being able to cover the cost of the mortgage, then you can go for decreasing cover. The critical illness policy pays out once and then ends.

• Find out more: mortgage protection life insurance explained

Should I get income protection or critical illness cover?

Income protection insurance provides ongoing financial support in the form of a regular income if you're unable to work due to illness or injury. This can offer peace of mind knowing that you'll still have a source of income to cover your regular expenses, such as bills, your mortgage or rent.

Critical illness insurance, on the other hand, offers a lump sum payout if you're diagnosed with a serious illness listed in the policy. The immediate payout can help cover medical expenses, mortgage payments, or other financial commitments that may come up due to the illness. Think of it as financial armour against unexpected health issues.

If you want steady financial support to cover your day-to-day expenses and have family members depending on your income, you might lean towards income protection, even though it might pay out less overall. Or, If you're worried about how a particular serious illness might affect your finances and need immediate help, critical illness cover could be a better fit.

Ideally, having both types of cover offers comprehensive protection against different scenarios. But if budget constraints make that difficult, consider prioritising based on your individual needs and circumstances.

• Find out more: Family income benefit insurance explained

What illnesses are covered by critical illness insurance?

The exact conditions covered by critical illness policies vary between providers. However, certain illnesses are covered as standard by most insurers. These include:

• Cancer
• Heart attack
• Stroke
• Organ failure
• Multiple Sclerosis
• Alzheimer's disease
• Parkinson's disease.

You may have the option to add specific additional diseases to your cover for an extra charge, while some insurers will cover your children too when you take out a policy.

• Find out more: Life insurance with cancer compared and explained

What isn't covered by critical illness insurance?

Your policy may only offer protection once your illness hits a certain level of severity.

Not all cancers will be included, for example. While to make a claim for other illnesses, you may need to have permanent symptoms.

Different insurance companies don't cover different things. Policies may not pay out for things such as:

• Being diagnosed with an illness outside of your policy term
• If you pass away during the term
• If you die within a certain number of days of receiving the diagnosis
• If you are diagnosed with a critical illness not covered by the insurer

It's vital that you read policy documents thoroughly so that you understand what is and what isn't covered. Many insurers will insist on having the illness verified by a UK doctor or specialist.

This insurance is also different from statutory sick pay, so it's important you know the difference. 

• Find out more: Whole-of-life insurance explained 

How much does critical illness cover cost?

When you apply for critical illness insurance, you will have to provide details of your medical history for the insurer to quote a cost.

If you're in good health, it should be quick and easy to get an idea of the cost of critical illness cover.

To give you an idea of the potential costs associated with critical illness cover, we've compiled illustrative quotes based on different scenarios. Each quote is tailored to a non-smoker working in an administrative role.

It's important to note that these quotes are estimates intended to provide a rough idea of critical illness cover costs. Actual premiums can vary based on factors such as your health, lifestyle, and the specific terms of the insurance policy.

• Find out more: Accidental death life insurance and cover

 How much critical illness cover would I need?

To work out how much critical illness cover you may need, read our steps: 

1. Review your monthly expenses: this includes your rent or mortgage, utility bills, groceries, and other essentials. Also, consider any upcoming financial commitments, such as your children's education costs or outstanding loans.
2. Assess the impact: imagine a scenario where you're unable to work due to a critical illness. Calculate the potential decrease in your income during this period, factoring in any disability benefits or alternative sources of income. Decide how long you would need financial support to cover your expenses comfortably.
3. Calculate treatment costs: think about the potential costs involved in treating your illness. This includes not only medical bills but also rehabilitation expenses and any necessary adjustments to your living space, like installing ramps or handrails.
4. Check your resources: it's important to assess your existing financial resources, such as savings, investments, or assets, that could help cover these costs. While these resources can provide a safety net, ensure you have enough for both your short-term and long-term financial needs.
5. Stay ahead of the curve: lastly, remember that your money situation might change over time. So, it's really important to regularly check your insurance to make sure it's still enough. Things like inflation and changes in how you live can affect how much you need. 

Can I get critical illness cover if I've suffered an illness?

You must tell the truth in your application about any pre-existing conditions – if the insurer finds out later on that you weren't entirely honest, it could void your entire policy.

Having a pre-existing condition doesn't mean you will be unable to find critical illness insurance.

However, it does mean that any cover you do find is likely to be more expensive. It also may have more extensive exclusions than for people who don't have a history of medical issues.

• Find out more: life insurance for diabetics 

When does critical illness insurance pay out?

When you make a successful claim on your policy, the money is paid out in a single lump sum.

The exact time taken to make the payment will vary between providers – though processing a claim can take months.

Contact your insurer as soon as you receive the diagnosis so that it can talk you through the claims process and how long it's likely to take before you receive the money.

• Find out more: Best life insurance costs compared

Bundled critical illness and life cover

Do note that where your critical illness cover is bundled into a life insurance policy, if you receive a payout for the critical illness, the amount that could be paid out if you later die within the term will be reduced. Separate critical illness cover and life insurance polices avoid this.

• Find out more: can I take out more than one life insurance policy?

Will my critical illness payout be taxed?

Payments from a critical illness policy are not classed as income, so you won't have to pay any income tax on the money you receive from your insurer.

Your loved ones could face a potential inheritance tax bill, however. If you take out a joint life insurance and critical illness policy, and make a claim but do not receive the money before passing away, the payout forms part of your estate.

If your estate is valued at more than £325,000, inheritance tax will be charged on the insurance payout.

It is possible to get around this by writing your insurance policy in trust. This is where your policy is held within a trust and so classed as being outside of your estate.

• Find out more: how to write life insurance in trust

Do I need critical illness cover?

While some state benefits are available to help people who fall ill, they are unlikely to stretch very far – at best you may be able to claim around £100 a week.

It's also worth considering critical illness cover if your employer does not offer much to help employees who develop long-term health issues.

You'll find details of your company sick pay entitlement in your written statement of employment, which you should receive within two months of starting work. Agency workers qualify for SSP. 

Many employers offer sick pay entitlement but this can end after six months, at which point a critical illness cover payout may be helpful. It's also worth noting that you're not eligible for SSP if you're receiving statutory maternity, paternity, adoption or additional paternity pay.

Taking out critical illness cover can also help cover expenses in your day-to-day life. Rather than eating into your savings, a payout from insurance may help with costs including rent payments, a repayment mortgage and energy bills.

• Find out more: statutory sick pay explained

Can you buy critical illness cover on its own?

Yes, you can buy critical illness cover as a separate policy, without it being bundled with life insurance. 

It's worth checking what the policy covers and make sure it fits your needs. Also, think about your financial situation and decide if just having critical illness cover is enough, or if you might need other types of insurance, like life insurance, to cover everything you need.

• Find out more:  What is life insurance? The different types explained