Critical illness insurance

This ‘special’ insurance pays out a lump sum if you suffer from one of a range of specified health problems. Although it is sold by life assurers, it actually has nothing in common with life insurance.

For a start, you don't have to die to benefit from the critical illness insurance policy. This insurance is designed to pay out a lump sum - which is tax-free - in the event of you suffering from a serious illness or if you have to undergo certain types of surgery.
The lump sum paid out by the critical illness insurance is to help with the extra costs of living with a particular condition but it's important to note that it only pays out if you contract one of a defined list of illnesses. In other words, if your illness isn't on the list, you won't get anything.

Unless you have substantial savings, or some other sources of income, some type of critical illness insurance may well make sense for you. How much you should have depends on your circumstances. Consider the lump sums that you might need in the event of contracting a serious illness; being able to pay off the mortgage, for example, or to do renovations to your home. If you're able to cover the necessary lump sums from your own or your partner's savings, then critical illness insurance may well be unnecessary and it may be more appropriate to concentrate on income protection.

However, assuming you do want critical illness cover, you'll not be surprised to hear that there is a wide range of policies available. The size of your insurance premium will depend on your age, sex, health, occupation, whether or not you smoke, the type of cover you need, and how long you need it for. Bear in mind you'll have to pay more if one of the core illnesses happens to run in the family. The best thing is to keep it simple.

Usually you'll pay a fixed amount premium for a fixed time period but some policies are flexible, which allows you to increase the level of critical illness cover as you go. On the whole, though, as with life insurance, if you are doing a proper job of saving, you are likely to want your level of cover to be reducing rather than increasing. Don’t pay for something you don't need.