Choosing a Critical Illness Insurance Policy

Depending on your life situation, you may need a lump sum of money for mortgage payments, for medical treatments, to replace income, etc.

Critical illness insurance helps you to be able to afford treatments and keep your assets without having to worry about the financial burden.

You do not have to be employed to purchase critical illness insurance. Most policies will cover ages 18 to 60 years and some companies will allow you to extend your coverage to age 75, once you are covered.

Some examples of medical conditions critical illness insurance cover: cancer, heart attack, kidney failure, stroke, organ transplant, loss of sight/speech/hearing, Alzheimer's disease, etc. Watch closely because every policy is different.

Some critical illness insurance policies allow ways to reduce your premiums. Some policies offer life coverage and critical illness together for a discount. Gym memberships are offered by other policies and when you use them and have a health screening your premiums can go down. Non-smokers can sometimes save up to 50% with some policies. If you smoke, you can still receive a lower premium if you quit for 12 months.

In general, critical illness cover is probably not the most appropriate way to insure your income in the event that you suffered a long-term period of incapacity or ill health and were unable to work. In such an eventuality, Income Protection (PHI) cover is usually a more suitable (and cheaper) way to do this.

Therefore, as critical illness plans pay the sum assured in a lump sum amount (as opposed to Income Protection plans that pay out a regular income), the first call upon such a payout is to clear all your liabilities - i.e. your mortgage and other debts. The rationale for this is that while recovering from a serious illness, the last thing you need is money worries and liabilities hanging over you and causing additional problems.

However, there are some other valid use for critical illness payouts - namely to cover the costs of a personal carer if an individual became so incapacitated by an illness that they needed additional help to perform normal activities of daily living (such as washing, dressing, preparing meals, etc). If this scenario was applied to a couple, even the incapacity of a non-working spouse with childcare responsibilities could lead to significant financial and emotional strain.

The cost of providing personal care depends upon many factors - such as the amount of care required (in hours of the day), but more significantly upon the area in which you live. i.e. the cost of employing a carer is always going to be more expensive in London that it is in Newcastle or Edinburgh.

Also, if an individual or couple has children under their care, if either party was incapable of working or looking after the children, it could become necessary to pay for childcare costs in order to continue working - as the alternative could be to leave work and rely on state benefits.

The same point about working out the approximate cost of childcare is similar to point about the costs of employing a personal carer, as it depends on many factors. A full-time nanny or child-carer will cost c. £20,000 per annum, but will be more in London, and less in other areas of the country. It also depends on whether such childcare is full-time or part-time, and whether the carer lives-in or lives-out. Obviously if you have family members living near-by who you could rely on to help out, this could reduce significantly the amount of paid help that you would require.