Life and critical illness cover can be combined into one policy to provide financial protection against the risk of death or of suffering a serious illness or injury. Such a policy would pay out a tax free lump sum to you or your loved ones should you either pass away or suffer a serious illness such as cancer or a stroke.
Key policy features and options
- The life insurance part of the policy would payout a lump-sum should you pass away (which would be tax free provided it is a joint policy or it is written into trust).
- The critical illness part of the policy would payout a tax-free lump sum directly to you should you suffer one from a list of serious illnesses as detailed in the policy conditions, a good plan will cover around 35 conditions.
- Cover can be taken out to protect a mortgage loan, whether that is a repayment loan (decreasing term cover) or an interest only loan (level term cover).
How does the policy work?
It is very common for life policies to be combined with critical illness protection. Premiums are quotes for the combined policy and only one application needs to be made. This type of policy provides cover for two important risk factors, death and serious illness or injury.
It is common for the level of cover for both parts of the policy to be set at the same level, £100,000 of life cover and £100,000 of critical illness cover. In this case the policy would only payout £100,000 once, either if you were to die or suffer a critical illness specified in your policy.
Can the sum insured for life cover differ from critical illness cover?
It is possible to set the sum insured at a different level for critical illness protection than for life insurance. Some individuals decide that some level of serious illness cover is better than not having any cover at all. In this case the policy would payout the critical illness benefit upon a claim being made and then payout the remainder of the sum insured upon death.
For example, suppose an individual took out a policy with £100,000 of life cover and £50,000 of serious illness cover then £50,000 would be paid out if the policyholder suffers a serious illness and the remaining £50,000 would be paid out upon death (provided that these events occur within the policy term).
When will life and critical illness cover payout?
Both sides of the combined policy will payout for very different reasons. The life side of the policy would payout if you were to pass away or contract a terminal illness within the policy term. The critical illness side of the policy would payout of you were to suffer one of a number of critical illnesses which are specified in your policy documentation.
Please note that a terminal illness is very different from a critical illness. A terminal illness is an illness where a doctor has diagnosed you with a condition leaving you with less than 12 months to live, although a critical illness may be life threatening many do recover from there conditions and go on to life for many more years, the list below details some of the common critical illnesses likely to be covered on a policy.
- Heart attack;
- Cancer;
- Stroke;
- Alzheimer’s disease;
- Kidney failure;
- Major organ transplant;
- Parkinson’s disease;
- Paralysis/Paraplegia;
- Blindness.
For personal and family protection
Life insurance and critical illness, when in combination, form an excellent means of both personal and family protection. The payout from the policy can be used for whatever purpose you so wish, whether that be for living expenses, debt repayment or medical treatment in the case serious illness.
It is hard enough for family members to deal with the loss of a loved one without the financial burden it might place on them. The life cover is designed to ensure that your family have funds to maintain their standard of living should you not be around to provide for them.
The illness side of the policy provides the same form of protection. It is likely that time will have to be taken off work or you may not be able to work again. The payout from the policy would enable you to cover lost earnings and maintain a financially healthy household.
Thus, if you were to pass away or suffer a serious illness then there is likely to be a significant dent on family or personal finances. In this light, such a policy could be viewed as a buffer or financial planning against the risk of these potential outcomes.
For mortgage protection
Life and critical illness insurance can be taken out to cover a mortgage loan. It is possible to arrange cover to protect a repayment mortgage or an interest only mortgage. Combining life and serious illness your mortgage could be repaid in full should you pass away or suffer a critical illness.
Cover where the sum insured declines over the term of the policy is designed for a repayment loan, as your outstanding debt declines over time so does the level of cover. A fixed level of cover would be most appropriate to cover an interest only loan as the sum insured remains fixed over the term of the policy as does your outstanding loan.
Joint life and critical illness cover
Joint policies can be taken out to provide joint family or mortgage protection. The policy would payout if either of the policyholders were to suffer a serious illness or pass away. Please note that the plan would payout once and then terminate.
Next steps
If you would like to compare life and critical illness cover policies from the UK’s leading insurers then please contact us or complete your details in the quote box above. If you need any advice on your policy choices then we are here to help.
There are a number of other useful resources across the web including the FSA Money Made Clear section covering insurance and a guide to life insurance on the health site Medic8.
