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How does Critical Illness Cover work?

Contracting a critical illness comes with hundreds more variables than the two that apply to life insurance (namely alive or dead!). That???s why it is a more complex and much more expensive insurance product to buy. Here's how it works. Each insurer will have a list of critical illnesses or conditions that it will cover. But although Virgin Money offers 20 conditions, Friends Provident offers 28 and the Prudential offers 46, there is only seven 'core conditions' that are set down as a minimum requirement by the Association of British Insurers (ABI). In the form of a rather depressing list, they read:

Again, you will choose a sum assured according to your mortgage, salary, dependants and other financial commitments, and if you contract one of the policy's listed diseases, you will receive a lump sum.

How will my critical illness insurance premium be calculated?

It is more difficult for insurers to price the risk of individuals contracting a serious disease, although your health, age and family's medical history are all factors that will be taken into account. But more generic boundaries are shifting all the time says Hamilton, and this translates into higher premiums for all. "Premiums for this type of cover have gone up 50 per cent in the last two years as a result of advances in science and diagnostic techniques - it's now easier and quicker to be diagnosed with a critical disease and this means more payouts." Premiums will also differ according the returns insurance companies receive from investing your money - and over the last couple of years, the stock markets have not been good.

Cutting down the cost the cost of critical illness insurance

But there are measures you can take to cut back on the cost of your life and critical illness cover. Quitting smoking and buying a policy while you're still young enough to attract low premiums are obvious ones. But you can also take a joint policy with your partner or spouse, which will usually pay out on the first illness or death that occurs within the couple. "But if a family is involved, it's not that much more expensive to take two separate policies," says Hamilton. "In fact there is a growing trend towards this."
Of course, the age-old mantra of shopping around can also save you a tidy sum. You can do this online (look at the box of online brokers) or use an Independent Financial Adviser (IFA) by logging onto unbiased.co.uk.

Is the cheapest critical illness cover the best?

But be warned that when it comes to insurance the cheapest policy may not always be the best. For example if a quote appears to be excessively cheap, check that the premium is guaranteed. "When you look at how much rates have gone up recently, it's really important to fix a guaranteed premium." says Paul Cowman, head of protection at insurer, Prudential. "After all there's nothing to say they won't rise that much again."
Check also that there are no exclusions on your list of illnesses that you might require. Stress and HIV are two examples of peripheral conditions that are rarely offered by insurers. "And don't be swayed just by the number of illnesses an insurer covers," says Cowman. "They are all described in different ways so it's the breadth of cover you should be concerned with."
Look also to see if there are any 'waiting periods' before which you cannot claim. It sounds grim but some insurers will not pay out on a suicide for example if it occurs within one - sometimes even two - years of taking the policy. And probably more grim, check to see if the policy covers the illness or death of your children, as again, this could have a serious impact on your earnings.

Conclusion

After paying years of premiums and then finding yourself in the devastating position of having to make a claim, the only way things could get worse, is if the insurer refuses to pay out. This is why it's vital that you are brutally honest on your application. Falsely declaring yourself a non-smoker for example might save you a few pounds in premiums but it will prove a drastically false economy when you - or worse your family receives nothing.