Thousands of people could miss out on vital insurance payouts if they become seriously ill because they do not understand how their critical illness insurance policies work.
Research from the Financial Conduct Authority (FCA) found that more than two-thirds of policyholders wrongly thought they would be able to claim on their critical illness cover if they contracted any illness which meant they could not work.
In fact, most critical illness policies will only pay out if individuals are diagnosed with any one of several specific life-threatening conditions: these typically include heart attack, stroke, and cancer.
Critical illness insurance can offer very important cover – particularly if you are your family’s main breadwinner – but it is vital you know what you are signing up for when you take out a policy.
How the cover works
Critical illness insurance is long-term cover that pays out a lump sum when a policyholder is diagnosed with any of the serious conditions covered by the provider.
The idea is that the payment can be used to clear an outstanding mortgage balance, provide a safety net for the policyholder’s dependants, or even go towards treatment.
There are a number of core conditions that the vast majority of policies cover: these include cancer, stroke, heart attack, kidney failure, major organ transplant, and multiple sclerosis.
As it pays out a lump sum, it is less suitable for replacing a regular salary – policies such as income protection insurance could be considered for this. (See our article: How to cope when financial disaster strikes.)
Generally speaking, you have to tell your insurer about your family’s medical history and about any of your own pre-existing conditions, which could then be excluded from cover. You may also have to undergo a medical exam in some cases.
Premiums will be lower the younger you are, but any medical conditions will push up the cost.
When you sign up for a policy, you will be able to choose the amount it would pay out, as well as whether your premiums are fixed or reviewable.
The payout could be linked to your mortgage, for example.
Fixed, or guaranteed, premiums will be higher at the start, but you will have the peace of mind that they cannot be raised further down the line.
With reviewable premiums, however, your insurer will be able to increase the cost of cover, for example if market conditions change or if your health deteriorates in other ways.
You will also be able to choose which potential illnesses are covered.
What to watch out for
The FSA’s research found a large amount of confusion over the extent of cover provided by critical illness insurance.The study showed that seven in every 10 policyholders thought they would be able to claim as soon as one of the specified illnesses was diagnosed.
But in fact, most policies impose a minimum severity level on conditions: so, for example, in the case of a heart attack, an insurer may need evidence that a customer’s health was permanently impaired before agreeing to pay out. Equally, many providers will not settle claims for cancers at stage 1, or non-invasive strains of the disease.
Insurers are obliged to make all exclusions clear to customers before they sign up for cover, but it is up to each individual to check their policy documents and small print in advance.
One of the most crucial things to ensure is that you have disclosed all medical problems honestly in advance: any mistake could lead to a payout being refused, even if it is not directly linked to your claim.
Changing your cover
If you want to change the amount your policy pays out – for example if you get a bigger mortgage – then contact your insurer and ask it to extend your cover.
If you have guaranteed premiums, it could be a bad idea simply to end one policy and set up a totally new one; and if your health has deteriorated, this could also make premiums on a new policy substantially higher.
Having trouble working out how much life cover you will need? Our life insurance calculator could help you out.