Life Insurance and Critical Illness Cover explained
If you’re wondering how to choose between life insurance and critical illness cover, or even if you are unsure about what they are, this article will help explain them to you.
Are critical illness cover and life insurance the same thing?
They’re not. While they can both help ease financial pressure after a significant future life event by paying out on a valid claim, they’re for two very different situations.
A life insurance policy is there to help look after your loved ones financially if you pass away within the policy term. It’s about making provision for your children and partner when you’re no longer around.
Critical illness cover is about helping you live life after a serious illness, by paying out a lump sum if you are diagnosed with, or undergo surgery for, a critical illness covered by the policy and survive for at least 10 days. That could help you worry less about your finances while you get the treatment you need and recuperate.
What could the payout help cover?
A critical illness policy pays out in one lump sum. That could be the full cover amount, or a partial payment, if it’s listed as an ‘additional’ critical illness, or if the claim is for a child’s critical illness.
It’s not considered a specific replacement for your regular salary but if you can’t work for a while the lump sum could help take the financial pressure off you.
The tax-free payout could go towards general living costs, so that you have a financial boost to help you manage your day to day living. It could help cover monthly rent payments, or instalments on a loan or a repayment mortgage. Or perhaps you’d want to put it towards bills and other regular outgoings such as childcare costs. You might also want to factor in potential treatment and travel costs, or adapting your home to make life easier with your condition.
With life insurance, it’s about what your loved ones might use it for when you’re gone. While your considerations will be broadly similar, you might also want to bear in mind funeral costs and making up for your lost salary. Or you might want to provide a buffer against unexpected costs, or just help make sure they can afford to stay in the family home.
Who gets the life insurance or critical illness cover payout?
With life insurance, the payout either goes to the joint policyholder or, if it’s a single policy, it’s paid into your estate for the executor to distribute.
For more control over who gets the payout, you could consider putting your policy in a Trust. As it won’t be counted as part of your estate, the money will usually be exempt from Inheritance Tax.
If you have critical illness cover and make a full or partial claim, you’d get the lump sum as the policyholder. So the money, and the decision making, would be in your hands.
Do insurers tell you what to use the payout for?
An insurer won’t tell you or your beneficiaries how the lump sum should be spent. It’s up to you or the people you leave the money to.
What it’s used for can also depend on the type of cover you choose when you take out the policy – whether it’s level or decreasing cover. Level cover is about helping towards living costs, and maintaining living standards, while decreasing cover is usually focused on mortgage protection, to help pay off a repayment mortgage, or a long-term loan.
Whether you have joint or single cover, life insurance and critical illness cover policies only pay the full cover amount once, and they end after that. The policy will end if premiums are not paid and if the policy has no cash in value at any time.
Can you take out critical illness cover and life insurance?
You can, and you might choose to, because they’re for different things. Depending on your insurer, you can take them out separately, or as one combined policy.
The good thing about having two separate policies is a successful critical illness claim won’t affect your life insurance policy, which can still pay out if you pass away during the policy term.
Are premiums the same for both policies?
If your cover isn’t a combined policy, you can usually choose different cover amounts and terms for each policy, if that reflects your needs.
Your premiums will be based on things like the length of cover, your cover amount, your age, medical history, lifestyle and occupation. Adjusting the number of years you want a policy to run for, or how much cover you choose, can help reduce your premiums if that’s what you’re looking to do.
Generally, critical illness insurance tends to be more expensive as you’re usually more likely to get a critical illness than pass away during the policy term.
As an independent financial adviser, Blackford Financial Services can help advise you on the correct levels of cover to ensure you and your family are properly protected. Ask us about our free initial review at any of our Island offices.