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Critical illness insurance explained

Critical illness is a form of insurance, often sold alongside life insurance, which will provide you and your family with financial help if you develop a serious health issue.

In this article
What is critical illness insurance? How does critical illness insurance work? What illnesses are covered by critical illness insurance? What isn’t covered by critical illness insurance? How much does critical illness insurance cost?
Can I get critical illness cover if I've suffered an illness? When does critical illness insurance pay out? Will my critical illness payout be taxed? Who is critical illness cover right for? Get life insurance and protection advice

What is critical illness insurance?

If you are 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, paying out a lump sum payment when you are diagnosed with one of the specific critical illnesses covered by your policy.

Looking to buy life insurance or protection?

If you decide you need advice, make sure you consult an independent life insurance broker.

Which? Financial Services can refer you to an impartial, no-obligation third-party advice service to provide you with the best life insurance or mortgage insurance policy tailored to your individual needs. 

Find out more about the life insurance referral service at Which? Financial Services.

How does critical illness insurance work?

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

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

It’s a good idea to sit down and work out what sort of sums your family would need in order to live comfortably if you were to develop a serious illness and no longer be able to work.

The main driver for many people buying critical illness insurance is to clear their mortgage balance if they become seriously ill, but it's worth taking into account any other debts, household bills you pay as a homeowner and the potential costs that would be incurred from your medical treatment.

You may also want to put aside a few years' worth of your salary to give you the option of not working for a long period. 

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. 

What illnesses are covered by critical illness insurance?

The exact illnesses 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.

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 you may need to have permanent symptoms in order to make a claim for other illnesses.

As a result, it’s vital that you read policy documents thoroughly so that you understand what is and what isn’t covered.

How much does critical illness insurance cost?

When you apply for critical illness insurance, you will have provide details of your medical history to an insurer in order to work out what to charge you. 

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

The eventual price you pay for your cover will vary, based on a range of factors including your age, health, and lifestyle, as well as how much cover you require.

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 does not mean that you will be unable to find someone that will offer you critical illness insurance.

However, it does mean that any cover you do find is likely to be more expensive, and may have more extensive exclusions than for those people who do not have a history of medical issues.

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. Aegon, for example, says that it will take up to eight weeks.

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

Will my critical illness payout be taxed?

Payments from a critical illness policy are not classed as income, so you will not 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 in our guide to how to write life insurance in trust.

Who is critical illness cover right for?

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.

Get life insurance and protection advice

Which? Financial Services Limited, part of the Which? Group, can refer you to our trusted partner to help you find insurance for your needs. Find out more at Which? Financial Services