Critical illness cover used to be known as dread disease insurance. Whatever you call it, you probably need it. Here’s what you need to know before buying a policy.

Not for nothing is the old name for critical illness cover actually “dread disease” insurance.

What critical illness protects against

There are a range of core diseases common in all policies:

Cancer
Heart by-pass surgery
Heart attacks
Kidney failure
Major organ transplants
Multiple sclerosis
Strokes
Some policies contain a far longer list, including Alzheimer's, Aids or motor neurone disease. Whether you actually need cover against them is another matter.

Total permanent disability – typically the result of an accident - is sometimes covered, and is worth having.

How critical illness insurance works

The policy is a bit like term life assurance. You pay a series of monthly premiums for an agreed period of time. Should you be diagnosed as having one of the illnesses set out on your policy, the insurer will pay out an agreed lump sum, free of tax.

Should your policy expire without your having contracted any of these illnesses, you receive nothing.

Is critical illness worth having?

Here are some facts:

One in three people in the UK will contract cancer at some stage and more than 1 million people suffer from it at any one time
More than 260,000 people suffer a heart attack every year – of which half are survived. Meanwhile, 1. 4 million people suffer from coronary heart disease
One woman in four and one man in five will suffer a stroke at some stage in their lives
About 18,000 patients currently receive kidney dialysis each year
About 85,000 people have MS, with 2,500 new diagnoses made each year
Over 120,000 people have Parkinson's Disease, while 180,000 people are diagnosed as suffering from an Alzheimer’s-type disease each year.
In many cases, these diseases will strike late in life, at a time when insurance is either not needed or would be prohibitively expensive even if available.

However, serious illness is not the preserve of older people. And advances in medicine mean that even when diagnosed with a very serious disease, you could survive for some time.

Cancer: Among newly-diagnosed 20 to 40-year-olds with cancer, over 50% of men and 65% of women will be alive five years later

Heart Attacks: More than 50% of victims are still alive 10 years later, according to the British Heart Foundation

Stroke: Nearly 70% of stroke victims survive for at least 12 months, according to the Chest Heart Stroke Association

So the questions you have to answer are:

How lucky do you feel in terms of NOT contracting such an illness?
What kind of protection do you have if you contract such an illness? Forget for a moment about the company sick pay scheme: what happens if you need expensive adaptations to your home, such a stair lift or new bathroom?
Were that “dread moment” to occur, might it not be nice to know that you have a large lump sum - perhaps even to pay for something you have always wanted to do while undergoing treatment and/or recuperation?

Here are a few issues you should be thinking about:

1. How much cover do you need?
Most people tend to look for a lump sum large enough to pay off their mortgage, plus a bit over for any other immediate emergencies. If your mortgage is small, think about the kind of sum you might need to give yourself the kind of treat you have always dreamed of. For example, a round-the-world cruise.
2. What do you need cover for?
There are many different policies, offering cover for a wide range of conditions. In practice, you will be torn between protecting yourself against everything and being more selective.
For example, we have already mentioned Alzheimer’s: but how many people are likely to contract this illness before 55? So if you are 35 years old, why pay more to guard against it? Similarly, with accidental exposure to HIV/Aids: a few firms will offer this but unless you are planning to go abroad for a fairly long time, or you work in an environment where infection is a potential danger, do you need this type of cover?
3. How long do you need the policy for?
Most people tend to have it either for the duration of their mortgages or until they retire, in the latter case because it gives them that “world cruise” option.
4. Do you need protection against inflation?
You can have automatic updating of payouts – of course, you end up paying more for them.
5. What happens if you die within a few days of diagnosis?
It may surprise you to know that most insurers won’t pay out if you “pop your clogs” between 14 and 28 days of diagnosis.
The easy way round this is to have what was called “accelerated life insurance” – that is, a combination of life and terminal illness cover. Payout happens on diagnosis of a dread disease or death, whichever comes first. Premiums are usually cheaper for the two policies combined rather than buying them both individually.
6. Are your other benefits affected?
Some state benefits - like the state pension – are not means-tested so you would still be able to claim despite a lump sum payout. But such a payment would undoubtedly affect things like your Pension Credit, or help with nursing home fees.
For a higher standard of living you need to make private provision.
How are bills charged?

Premiums depend on:

Age – the older you are, the more you pay
Gender – women pay more at a younger age because they are more prone to cancer. This differential decreases later in life
The amount you insure for
Occupation also counts – a white-collar worker pays less than a manual worker
The number of conditions you protect against – the most basic number of conditions covered is usually five or six. the most sophisticated protects against 30 or so, including weird and wonderful conditions such as balloon angioplasty
What else to think about

Many policies protect against “total permanent disability”, being unable to look after yourself or work. Generally, it makes sense to buy a policy that has an “own occupation” definition of work, as opposed to “any occupation”. Otherwise you could be required to take up a different job if you become ill rather than receive a pay out.
Some policies, as we have seen, can be bought as “standalone” products. Others can be combined with life cover. The two together are often cheaper.
Indeed, it is often cheaper to abandon an existing life policy, especially if taken out more than five years ago, and take out a combined one than buy separate critical illness cover on top of what you already have.
Be aware, though, that if you do that, your payout then means that you won’t get a second payout at death. And you may find it virtually impossible to get any separate life cover later.
You can also get deals which cover married couples on a “first person to get ill gets the payout” basis. These policies are cheaper than two separate ones. And it does not usually affect the ability of the non-critically ill partner to get cover in future.
If you can afford both, look also at permanent health insurance, or PHI. Unlike critical illness, PHI pays a regular income. After all, a lump sum is nice but even if you pay the mortgage off, what are you going to live on in six months’ time? Also, if your illness is not on the list, you still get a regular income if you can’t work.
Some final tips

1. Some companies will follow the exclusions in their small print to the last letter. It is important to go to someone with a good claims history. Generally, these firms are known to most good financial advisers.
2. Critical illness pays good commissions to those who sell it. Talk to your adviser about commission-sharing, or rebating. If he or she is not interested, others will be.
3. Some policies have renewable premiums, which means you might end up paying a lot more after a number of years. Generally you don’t want that.
4. If you stop paying premiums, you may lose the right to cover. If you think you may end up in that position, check that your insurer has a “premium holiday” facility.
5. If you die shortly after the lump sum is paid out, any amount left is added to your estate and your heirs may be liable to inheritance tax. Talk to a lawyer about how to reduce that danger.