How does critical illness cover work?
If you’re diagnosed with a critical illness during the term of your policy, critical illness cover can give you a lump sum payment while you’re still alive. Critical illness cover is an optional extra with most life insurance policies, so you’ll need to pay more each month to be covered.
Critical illness cover shouldn’t be confused with terminal illness cover. Terminal illness cover is often included with life insurance as standard and it can pay out if you’re diagnosed with a terminal illness and have a life expectancy of less than 12 months. Critical illness insurance, on the other hand, will cover serious illnesses like cancer, provided they are non-terminal.
Insurers will set a minimum and maximum term for critical illness cover – they typically range from 5 to 50 years. Critical illness cover also tends to have an age cap for when the cover must end – this could be 75 years old, for example.
Depending on the insurer, you can choose from level, index-linked or decreasing critical illness cover:
Level cover means you’ll pay the same amount throughout the policy and your amount of critical illness cover will remain the same.
Index-linked cover means your critical illness insurance amount will be linked to inflation. This protects your critical illness pay-out, but also means your monthly payments could get more expensive over time.
Decreasing critical illness cover is a popular option for those looking to cover their mortgage payments. As the amount owed on your mortgage decreases over time, your monthly payments decrease over time as well.
What are the types of critical cover?
There are two main types of critical illness cover to choose from:
Combined cover merges your life and critical illness insurance into a single policy. It only pays out once, so if you make a critical illness claim, your whole life insurance policy ends when you get your pay-out. You’ll no longer be covered, and your loved ones won’t get a second pay-out when you pass away.
A combined cover pay out is for the same amount as your life insurance. if you’re covered for £600,000, you’d get a one-time pay-out for that amount on a qualifying critical illness claim or if you were to die.
Additional cover splits your life and critical illness cover into two separate policies. If you claim for a critical illness, you’ll get a pay-out. Your critical illness cover will then end, but your life insurance cover will carry on. When you die, your loved ones will get a second pay-out – as long as you pass away during your life insurance policy’s term.
Additional cover policies let you decide how the cover is shared between critical illness cover and life insurance. You could take out £500,000 of life cover and £100,000 of critical illness cover, for example.
If you suffered a critical illness, you’d get the £100,000 critical illness pay-out while you were still alive. If you then passed away at a later date, your family would still get a £500,000 life insurance pay-out too.
Do I need critical illness cover?
Would your family struggle financially if you or your partner suffer a critical illness or life-changing injury? If the answer is yes, then you could need critical illness insurance.
Sick pay can help if you can’t work, but statutory sick pay is only £96.35 per week if you’re too ill to work. It’s unlikely to be enough to cover your loss of earnings. And as statutory sick pay is only paid for 28 weeks, you could soon be left with no income at all.
With critical illness cover in place:
- You’ve a better chance of surviving financially if you can’t work
- You won’t run down your savings to support you and your family
- You and your family don’t have to cut back just to stay afloat
Critical illness cover could help you maintain your family’s quality of life and living standards, allowing you to keep up mortgage or rent payments and continue paying for things like childcare. There may also be additional living costs to meet as a result of your illness or injury.
Some people use part of the funds from critical illness pay-outs to fund changes needed for their home or car if they’re left with a disability. You could also use a critical illness cover pay-out for private healthcare to speed your recovery, though health insurance may be a better option here.
Critical illness cover can be especially useful if you or your partner are self-employed.
You can also take out income protection insurance to cover for when you can’t work due to less serious illnesses.
What our life insurance expert says
It’s crucial to understand the two types of critical illness cover. Combined cover can be cheaper, but it only pays out if you’re sick or pass away. Additional cover pays out in both scenarios, but it can be a little pricier. Think about what’s right for you before you take out a policy.
Life insurance expert
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Your critical illness cover runs for as long as your life insurance policy, or until you make a claim.
If you have mortgage life insurance, it’ll run for as long as your mortgage.
If you have level term life insurance, you can choose how long you want to be covered for. Most people tie this to how long their family will be dependent on their income. If you have young children, this could be 20 years, but it could be longer.
You can even get whole life insurance that’ll cover you until the day you die, with added critical illness cover that’ll do the same.
There’s no expiration date for your critical illness insurance. As long as it’s within the cover period of your life policy, you’ll be eligible for a pay-out.
You can use your pay-out for whatever you want, but most people use it to:
- Cover their expenses, or their family’s expenses, if they’re unable to work
- Pay off their mortgage, taking some of the financial strain off their loved ones
- Pay for private healthcare if they need it, although health insurance is often a better option
- Make changes to their home or car if they’re left with mobility issues after an accident or illness
Terminal illness cover pays out if you’re diagnosed with a condition that limits your life expectancy to 12 months or less. Most life insurance policies will include this as standard, meaning that you’ll get your pay-out while you’re still alive, whether you have critical illness cover or not.
But if you’re diagnosed with a non-terminal condition - one that isn’t expected to kill you immediately - you won’t get a pay-out from your life insurance. Critical illness cover ensures you will. As long as your condition is covered by your policy, and is severe enough to be classed as critical, you’ll be able to claim.
No, critical illness cover is a one-time safety net. Once you claim, your cover ends.
With additional cover policies, your life insurance cover will continue after you claim on the critical illness aspect of your policy. You just won’t be able to claim for a second critical illness.
If you have combined cover, both your life insurance and critical illness insurance policies stop after you claim. If you want your life insurance cover to continue, you’ll then have to sign up for a new policy.
If you still want critical illness cover after claiming, you can take out another policy. To do this, contact your insurer to see what they can offer you. Or get another quote.
If you reach the end of your life insurance cover term without claiming on your critical illness policy, your coverage will simply end. You won’t be able to get back what you’ve paid in premiums.
The same is true if you pass away during your cover period without having claimed for a critical illness. Your loved ones will get your life insurance pay-out, but they won’t get back what you’ve paid in critical illness cover premiums.
Even so, the peace of mind that critical illness insurance can bring is often worth the extra you’ll pay in premiums. Cover can vary between insurance providers, so it's important to check the level of cover that your policy provides.
Both income protection insurance and critical illness cover can help keep you afloat if you’re ill or injured. But they work in very different ways.
Where critical illness insurance pays out a lump sum to help you focus on your recovery if you become severely ill, income protection is designed to cover your outgoings if you suffer a milder illness or injury. It pays a portion of your salary to help you maintain your standard of living while you’re on the mend. If you have a physically demanding job, but hurt your back and can’t work, for example, income protection can help bridge the gap until you’re fit to work again.
Critical illness cover is designed to ease the financial burden of a life-changing illness or injury, taking some of the stress out of an already stressful situation. What policy you choose to take out depends on what you want to be covered for.
Yes. Some critical illness policies will cover your children at no extra cost. Others may ask you to pay a little extra to cover them.
Cover for a child works in much the same way as an adult. If your child is injured or develops a serious condition, your policy will pay out. But the amount you’ll receive is usually lower for a child than for yourself, with the maximum being around £25,000. This can still help ease some of the financial burden of having a seriously ill child, giving you some breathing space to focus on what really matters – them.
No, the pay-out you’ll get from a successful critical illness claim is tax free. You’ll be given it in one lump sum payment that you can spend how you wish.
This isn’t the case with life insurance, where your pay-out might be subject to inheritance tax if the total value of your estate is over the £350,000 tax-free threshold.
If you want to make sure your loved ones get your full life insurance pay-out tax free, see our guide on writing your life insurance in trust.
Although some insurers may provide it, it can be tricky finding critical illness cover as a standalone product. The insurers we work with provide critical illness cover as a life insurance add-on. It’s there to give you an extra level of protection, with the aim of giving you the level of cover that you need. As always, we recommend that you check the level of cover that your policy provides before purchasing.
If you have additional critical illness cover, yes. Once you claim, your critical illness policy ends, but your life policy continues. As long as you keep paying your life premiums and pass away within your cover term in a way that’s covered by your policy, your beneficiaries will get a pay-out after you die.
With combined cover, you’re merging your life and critical illness policies into one product. You’ll only get one pay-out, either after you die or if you become critically ill. After that, your life policy ends and you’re no longer covered.
As with life insurance, the younger you are when you take out critical illness cover, the cheaper it’ll be.
Most people take out life insurance after a big life event, like buying a house or having a child. Once you have dependents, and serious financial commitments like a mortgage, it makes sense to cover yourself in case the worst happens.
However, it’s never too late to take out cover. Over 50 life insurance is available, no questions asked, until age 84. Even if you’re not in the best of health, you’ll still be able to find cover.