A Guide to Critical Illness Insurance

Transcription

1 A Guide to Critical Illness Insurance This guide about Critical Illness cover is designed to help you decide if this is a suitable product for you. It aims to help by answering the following questions: What is Critical Illness cover? How does Critical Illness cover work? How can I decide whether I need Critical Illness cover? If I decide to effect Critical Illness cover, what decisions do I need to make? Taking financial advice What other kinds of health protection products are there? What Is Critical Illness cover? Critical illness policies usually pay a tax-free lump sum if you suffer from one of the illnesses or conditions, or have one of the surgical procedures (collectively known as the critical illnesses ), covered by the policy. Common conditions covered are Cancer, Heart Attack, Stoke, Major Organ Transplant, Multiple Sclerosis, Blindness, Deafness, Paralysis and Parkinson s Disease etc. You should not confuse Critical Illness cover with other types of health insurance such as: Private Medical insurance which pays for the cost of private medical treatment or; Income Protection insurance which pays you a monthly income after you have been unfit to work (because of sickness or accident) for an agreed period. This income continues until you are fit to return to work or the policy ends. How Does Critical Illness cover Work? Critical illness insurance is designed to ease the financial pressures by paying a tax-free lump sum if you become seriously ill or totally disabled. You must normally survive at least 14 days (and often one month) after becoming critically ill, before the policy will pay out. Also known as dread disease cover, Critical Illness insurance pays benefits on the diagnosis of certain specified critical illnesses. The range of diseases covered has increased to more than 30, though contracts differ from one company to another. All policies should cover the seven core conditions, these are; Cancer, Coronary artery bypass, Heart attack, Kidney failure, Major organ transplant, Multiple sclerosis Stroke. They will also pay out if a policyholder becomes permanently disabled as a result of injury or illness. Additional conditions covered by some polices include: Aorta graft surgery Benign brain tumour Blindness Coma Deafness Heart valve replacement or repair Loss of Limbs Loss of speech Motor neurone disease Paralysis / Paraplegia Parkinson s disease Terminal illness Third degree burns Critical Illness Guide from Provident Solutions - June 2008.doc Page 1 of 5

2 Insurance companies may not cover all these critical illnesses but if they do, the company will use the Association of British Insurers (ABI) model definitions or alternatives that give more cover. Insurance companies may also cover other critical illnesses, for example total permanent disability, as well as those with model definitions. Will any exclusions apply to the cover? Critical illness policies usually contain certain exclusions (things which are not covered). Exclusions vary between insurance companies. The Key Features Document provided by the relevant insurance company will list the exclusions of that particular policy. The ABI have published model definitions for the most common exclusions. The headings of those exclusions are as follows. Aviation Drug abuse Hazardous sports and pastimes Living abroad War and civil commotion Criminal acts Failure to follow medical advice HIV/AIDS Self-inflicted injury Policies which include these exclusions use the ABI model definitions or an alternative that provides more cover. How Can I Decide Whether I Need Critical Illness cover? We all probably understand the risk of 'dying too soon' and the danger of leaving dependents in a precarious financial situation. However the chances of suffering a serious or critical illness such as developing cancer or having a stroke (and then surviving) are twice as likely as dying. So there is a very real need to ensure that both you and your dependents would be financially protected if you were to suffer from a serious or critical illness. Suffering a critical illness can lead to loss of earnings and financial disaster, dramatically reducing your standard of living and quality of life and could ultimately lead to the loss of your home. Did you know? 1 in 3 people develop cancer at sometime in their life. 1 in 4 males and 1 in 5 females will suffer a serious illness before retirement. Around 120,000 people have Parkinson's Disease and 1 in 7 are under 40 when diagnosed. Coronary Heart Disease is responsible for 12% of all working days lost through sickness. Each year, 120,000 people suffer strokes in the UK. Source: Financial Services Education for Consumers Limited 1999/03 If you re critically ill, the last thing you ll need is any financial worry like the fear of losing your home because you can t pay your mortgage. Critical illness cover aims to give you peace of mind in these circumstances. You therefore need to consider carefully what financial liabilities may need to be repaid in the event of you suffering a serious illness and being too ill to work. At Provident Solutions we have a sophisticated computer analysis tool that accurately calculates this figure for you, however below is a simplistic guide to give you an idea of the level of cover you may require. First calculate what your income would be in the event you were unable to work Potential income sources will depend on your personal circumstances and a number of factors: If you are employed: Your employer may continue to pay you for a limited time. Some employers will only pay Statutory Sick Pay. Others may be more generous. You should check what arrangements your employer has made. If you are self-employed or a member of a partnership: Your income will almost certainly cease, although your business may continue to generate income for a short time if, for instance, payment is outstanding for work already completed. State benefits: In the longer term you may receive Incapacity Benefit and other State benefits. Most of these benefits are means-tested and frequently re-evaluated depending on the severity of your disability. Critical Illness Guide from Provident Solutions - June 2008.doc Page 2 of 5

3 Also in most cases there are conditions that have to be met, such as your having paid sufficient National Insurance contributions. More details can be obtained from the government website ( You should note that the amounts of, and eligibility conditions for, State benefits may change in the future. Savings and investments: If you have savings, these may produce income that will not be affected by your incapacity. Cashing in some investments earlier than planned may, however, result in a financial loss. Such savings may also affect your eligibility for some State benefits. Pension payments: If you are receiving a pension from a previous job this is likely to continue despite your incapacity. Early retirement: You may be able to start receiving an early retirement pension. This will depend on the rules of the pension scheme(s) to which you belong, and may also be at your employer s discretion. Remember, any pension which starts early is likely to be significantly lower than if you had worked until normal retirement age. Alternative employment: Even if you were unable to undertake your usual work, there might be alternative work that you could do. This will very much depend of the circumstances of your disability and personal preferences. Second calculate your expenses If you are too ill to work for a long period of time, the way you spend your money may well alter. You need to consider how your expenses might change. Ongoing costs: Some types of expenses will continue. These include mortgage, rent and other housing costs, council tax, gas and electricity bills, etc. Some expenses may be covered by specific insurances (although it is common for such cover to be limited, say, to a year from when you become too ill to work). You should check whether your mortgage, hire purchase, credit card or loan repayments or pension contributions are covered by this kind of insurance. Work-related costs: Some expenses may reduce, or even be eliminated. These could, for instance, include the cost of travelling to and from your place of work. New costs: Some expenses will increase, or will be incurred for the first time. These may include, for instance, the cost of heating your home all day if you do not go out to work, the higher cost of food if you have been using a subsidised staff canteen, and the cost of medicines and possibly nursing care. A key cost may be the modernisation of your home to make it more accessible if you are suffering from a disability. Other costs: Some expenses are within your control, so you could economise if you wished to. These might include, for instance, holidays and entertainment, but would you really want to take this course of action? When might I need Critical Illness cover? Having considered the effect on your income and your expenses, do you think that you could cope with your changed circumstances if you were too ill to work? Would you be able to meet the payments of your financial liabilities such as your mortgage, loans, hire purchase and credit cards? Would you have the funds available to provide for special care requirements or house modifications etc. If not you should seriously consider taking out Critical Illness cover. When might I not need Critical Illness cover? If you have sufficient income from other sources: If your calculations do not reveal a likely shortfall, or if you believe you could realistically adapt your lifestyle to a reduced income, then you may consider that critical illness insurance is unnecessary. If you consider that you have adequate capital, savings or other resources to live on for however long you are too ill to work, then again critical illness insurance may be unnecessary. Critical Illness Guide from Provident Solutions - June 2008.doc Page 3 of 5

4 If your employer has comprehensive arrangements in place: Critical Illness insurance may be unnecessary if your employer has a satisfactory long-term sick-pay scheme (considering both the amount of any cover, and the length of time for which you would continue to receive an income). You could live on State benefits (assuming you are eligible): If you compare your income with State benefits, and feel that these will meet your needs, then you may not need critical illness cover however this is extremely unlikely given that incapacity benefit for the 2008/09 tax year is set at per week. You should note that the Government use their own definition of incapacity when deciding whether you can receive State benefits. This definition may not be the same one your insurer would use. If I Decide I need Critical Illness cover, What Decisions Do I Need To Make? Most insurance companies will offer a range of different policies. The overall cost of a policy is likely to be an important consideration. You should remember that, in general terms, the broader the scope of the cover, the greater the cost. For example, policies which cover additional conditions are likely to be more expensive than those that just cover the core conditions. The exact cost will depend on a number of factors, including your age, sex, occupation and your medical history as well as your family s medical history. A wide choice of policies are available, so it is important that you choose the policy and cover that is right for you. You can choose polices that: Provide Critical illness cover as an extra benefit on a life assurance policy: This usually means that the policy pays out if you die or suffer a critical illness. These plans generally only payout once and then end so they don t continue to provide life cover after paying a critical illness claim. Protect your mortgage: Repayment Mortgage - On these types of polices the level of cover will decrease each year as the level of the outstanding balance on your mortgage decreases over the term. Interest Only / Endowment Mortgage - On these types of polices the level of cover will remain the same throughout the term of the policy. Choose whether you fix the premium you pay from the outset of the policy: Guaranteed rates the amount you pay is fixed in advance. The amount you pay cannot be changed by your insurer, except in agreed circumstances (e.g. to rise in line with inflation). Reviewable rates your insurer can change the amount it charges you in the light of its costs, overall claims experience etc. This rate does not depend on any claims that you have made. At Provident Solutions, although Reviewable rate policies are less expensive initially, we only usually recommend Guaranteed rates as Reviewable rates may increase as you get older making the cover unaffordable when you most need it! You should also think about how long you want the cover for. You can choose cover for a set number of years, perhaps until your mortgage is paid off. Or you can choose a plan that has no fixed period, so you can keep the cover for as long as you need it. Choose whether to increase the level of your benefit over time: Some insurers will offer you the option of benefits which increase as inflation rises. This is because if the benefit which your policy provides remains at a constant level throughout its term, its real value is likely to diminish. The level of these increases will vary from insurer to insurer. Premiums will increase over the years as the level of cover provided rises (usually in line with the Retail Price Index RPI). Provide some Critical Illness cover for your children Many plans automatically provide some critical illness cover for your children. If you have a family, you may want to consider a plan with this benefit. Should I take Advice? Most Critical Illness providers publish a wide range of information on their products, but all are required to issue a Key Features Document to help you make comparisons between policies as not all insurance companies cover the same illnesses or have the same exclusions, however these documents are often cumbersome and can be complicated to understand. You will find talking to an expert financial adviser from Provident Solutions will be extremely helpful. Critical Illness Guide from Provident Solutions - June 2008.doc Page 4 of 5

5 What s more if you effect a policy without taking advice you will have no redress to the Financial Ombudsman Service, over any later complaints, about the suitability of the product. What Other Kinds Of Health Protection Products Are There? Insurance can give you the resources to cope when you encounter unexpected misfortune. Most people see good health as being very important, as it makes other aspects of life possible. The insurance industry can offer help in a number of ways to protect you and your family against the financial consequences of illness or injury. Insurers may combine different kinds of policy, however, the broader the cover the greater the cost. The main categories of product on offer can be split into long-term products, providing benefits for more than one year, and general insurance products, which are renewed annually. The different types are: Long-term insurance products: Income Protection Insurance Income Protection insurance which pays you a monthly income after you have been unfit to work (because of sickness or accident) for an agreed period. This income continues until you are fit to return to work or the policy ends. Private Medical Insurance Private medical insurance is designed to cover the costs of private medical treatment for what are commonly known as acute conditions. Long Term Care Insurance The insurance is designed to finance long-term nursing and other dependent care. A claim is payable if your health prevents you from caring for yourself. General insurance products: Accident, Sickness and Unemployment cover Accident, sickness and unemployment insurance typically provides benefit for a limited period. A common form of this type of insurance is Mortgage Payment Protection Insurance which usually covers your mortgage payments for a maximum of 12 or 24 months in the case of accident, sickness or redundancy. There is usually a waiting period before payments are made of either 30 or 60 days. How do I find out more? Call us now on and we can arrange an appointment to conduct a thorough analysis of your Critical illness cover requirements. Provident Solutions Ltd Kingston House Meadow Hill Great Glen Leicester, LE8 9FX. Tel: Fax: Critical Illness Guide from Provident Solutions - June 2008.doc Page 5 of 5