What is critical illness cover?
Critical illness insurance is a type of coverage that can pay out a tax-free lump sum if you are diagnosed with and survive one of the conditions covered. There are various pre-defined illnesses that are typically covered by insurers and most policies will have a fixed list of conditions that will trigger a payout. These range from cancer to multiple sclerosis, as well as less serious conditions such as knee replacement surgery or meningitis.
The amount you get paid depends on your policy, but £100,000 is typical. Each insurer has their own list of conditions they will cover, ranging from 35 to over 100 so it is important to check what is included in your policy before you buy. Having critical illness insurance should mean you don’t have to worry about how to pay any outstanding mortgage or other loans if you become ill – which may be particularly important if you don’t have life insurance or savings in place.
How does critical illness cover work?
If you’re an Australian resident aged between 18 and 64, you can apply for critical illness cover. This insurance covers a range of conditions that are considered serious enough to drastically change your life. They include conditions like heart disease, cancer, stroke and Parkinson’s disease.
The insurance pays a lump sum payment when you need it most so you can focus on getting better. You choose how you want to use your benefit payment – whether it’s covering medical expenses or supporting yourself financially if you’re no longer able to work.
Some policies pay out a partial payment if only part of the condition is met (for example, the diagnosis of cancer without any symptoms).
It depends on what type of policy you take out. Cover can be based on:
- Automatic triggers – where cover automatically applies because the condition meets certain criteria
- Specific triggers – where cover only applies if the condition is diagnosed by a medical professional as specified in the PDS
How much you’ll be paid
You are guaranteed a full sum assured. If you don’t work for a specified number of days, your insurance company will pay out the entire sum assured as per the terms and conditions of your critical illness policy.
Which illnesses are covered by critical illness cover?
There are two types of critical illness cover, non-fatal and fatal illnesses. The amount you’re paid out depends on the severity of your condition or diagnosis. Some policies cover both types of illness but some only cover certain ones. If you have a policy that covers both, the insurance provider will normally pay out the lower level of benefit for non-fatal conditions, so it’s important that you know what’s covered by your insurer.
Non-fatal critical illnesses include:
Multiple sclerosis
Kidney failure
Major organ transplants such as heart or lung transplants
Loss of limbs or paralysis caused by an accident
What isn’t covered by critical illness insurance?
Not all critical illnesses are covered. These typically include conditions that do not meet the definition of “critical” (as defined by the insurer) and may also include:
- initial diagnosis of a condition
- treatments and tests for any condition before it is diagnosed as critical
- some pre-existing conditions, depending on when they occurred
- some illnesses that are not life-threatening (such as chronic fatigue syndrome or migraines)
- conditions that are not listed in the policy
Can you pay off a mortgage with critical illness cover?
Even if you have critical illness cover, there are a few things to consider:
- How much would I need? A lender will usually only allow you to borrow up to 80% of the value of your home.
- Would I be able to pay back the loan? You’d still need a repayment plan.
- How long would I have to pay it back? Most mortgages last around 25 years but some plans could be shorter or longer. If you wanted the entire sum paid off in one go (or before you die) then you’d have to make sure the loan has a long enough term.
- What if I can’t pay it off? If for some reason your policy doesn’t pay out as much as you expected (for example, because your insurer didn’t agree with your claim) and this means that you’re unable to repay the mortgage in full, your lender may repossess your home.
Does critical illness cover have to be paid out?
The payout is not guaranteed.
Sometimes critical illness insurance must be renewed, and there are conditions that must be met before the policyholder can receive the payout. For example, the policyholder may have to pay an additional premium or meet a requirements similar to those of life insurance, such as having one’s blood drawn and going through a physical exam. The payout could also be delayed if the insurer needs additional information from you in order to determine whether or not they will release it to you.
If you do not meet the terms of the policy or provide incorrect information, then your claim could be denied and you will not receive any payments at all.
Are income replacement policies the same as critical illness cover?
- No. Income replacement policies are only paid out when you can’t work due to an illness or injury. They don’t cover serious illnesses that result in death, such as a heart attack or stroke.
- No. Income replacement policies are designed to last until retirement age and usually expire when you reach 65, often without any payout at all. This means that they’re not usually suitable if you’re diagnosed with a serious medical condition later on during your life (such as cancer).
If you have an income replacement policy and become seriously ill, your insurer may offer to increase your premiums so that the policy will continue to pay out until retirement age or death. In this case, make sure the extra money is worth paying before agreeing – it may be cheaper to take out critical illness insurance instead.
How long can I expect to live if I have a serious illness?
If you have a serious illness, how long can you expect to live?
The survival rate for cancer patients is improving over time. The survival rate refers to the percentage of people in a study or treatment group who are alive at some set point after they were diagnosed with cancer. For example, if the 5-year relative survival rate for a specific stage of an uncommon type of cancer is 60%, it means that people who have that cancer are, on average, about 60% as likely as people who don’t have that cancer to live for at least 5 years after being diagnosed.
But remember that your own outlook depends on many factors specific to you, including how advanced the disease has become by the time you are diagnosed. Survival rates are based on previous outcomes of large numbers of people who had the disease, but they can’t predict what will happen in any particular person’s case. And not all patients survive even when their cancers are found early and treated aggressively.
Critical insurance cover can be important for you and your family
Critical illness insurance can be important for you and your family. It can help you to pay for treatment if you are diagnosed with a critical illness.
It can also help you to pay for other expenses, like your mortgage or childcare, which may become more difficult to afford after a critical illness.
Critical illness cover may be appropriate for people who want:
- peace of mind knowing that they will have financial support after being diagnosed with a critical illness.
- the ability to repay their mortgage in the event of being unable to work due to a critical illness.
- financial support if they need specialist care or time off work due to a critical illness.