One of the options you’ll see on your life insurance application form is to include Critical Illness Insurance in your policy.

If you’ve had a quote for this extra cover already, you’ll know it doesn’t come cheap. But there is a reason why it costs substantially more than standard life cover. All insurance is about risk, the higher the risk of a claim the more expensive the premiums will be. Critical illness insurance insures against the risk of being diagnosed with one of the conditions covered by the policy and the chances of such a diagnosis before age 65 are greater than dieing. So whilst the cost is greater, so is the risk.

But this highlights just how valuable critical illness cover can be if you can afford it. There are many scenarios often used to demostrate how useful this cover can be, but the most obvious is if you are diagnosed with a debilitating illness such as Cancer which means you can no longer work. In this situation, you still need to pay the bills but can no longer maintain your income. Your life cover won’t pay out because you aren’t dead so any dependants you have must share the financial burden too. You might receive some support from your employer and a small contribution from the state but that will only last so long. This is where a critical illness policy can provide a cash lump sum which you can use to pay off all or part of the mortgage or other debts, supplement your income, buy private treatment for your illness or pay for specialist equipment to aid your recovery at home. The money is yours to use how you wish even if you make a full recovery.

Looking at the risk

This might sound a world away right now but it’s worth considering the statistics. It makes for grim reading but 1 in 3 men and 1 in 4 women aged between 40 and 70 will be diagnosed with a critical illness (source Munich Re 2002). But whilst the case for critical illness insurance is strong, it’s all for nothing if your insurer declines your claim when you need it the most.

Critical illness claims in the press

There has been considerable bad press recently which has focused on the number of declined claims for reasons which appear to be technicalities. Quite naturally, this has affected sales of critical illness cover as consumer confidence is undermined by stories of insurers apparently trying to avoid paying out. But when you look a little closer, many of these declined claims have one thing in common - non-disclosure.

Any insurance policy is a contract between you and the insurance company and as part of that contract you must be totally open and honest about your personal and medical circumstances. If you make a claim and the insurer discovers that you have not disclosed part of that information when answering very specific questions on the application, even if it is unrelated to the condition for which you are claiming for, they can and will decline it. And you can’t claim for any illness that you were aware of before you bought the policy, this is another common reason why claims are declined.

So there is no real reason to avoid critical illness insurance based upon the industries claims history, this can be misleading for many reasons. It’s far more important to understand how a critical illness policy could protect you financially and to disclose all information asked for on the application form, even if you don’t consider it to be relevant.

Understand what you are buying

It’s also important to know exactly what you are buying and what it covers you for. Critical illness insurance policies can cover a small number of core conditions or a much wider range on more comprehensive plans and it’s important to read the small print so you understand the terms under which each condition is covered. If you are in any doubt, you should consult and independent financial adviser who will consider your needs and recommend the most suitable policy for you. A national database of advisers is available at www.unbiased.co.uk.

Action steps

1. Do your home work, read the small print and understand excatly what the policy does and doesn’t cover. You can find further informa tion on critical illness cover at the FSA website.
2. Not all policies are the same. Take advice from an (whole of market) independent financial adviser if you are unsure.
3. Choose ‘guaranteed’ premiums if you can afford it.
4. Decide if you need a lump sum or income policy. Income policies are cheaper.
5. Most policies include an additional benefit called ‘total and permanent disability’ which can have two or more claims definitions. The best of these is ‘own occupation’ which means that the cover will pay out if you are totally and permanently disabled and unable to follow your own occupation. It’s easier to prove that you can’t follow your own occupation than ‘any occupation’ or ‘any suited occupation’ which are some of the other common definitions.