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Life insurance and critical illness cover: do I need both?

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31/08/2016
Life insurance and critical illness often get confused but there are important differences between the two types of cover.

In simple terms, life insurance will pay a defined lump sum to your loved ones when you die. The money can be used for anything – household bills, child care costs, mortgage payments or even funeral expenses.

Critical illness cover will pay a defined amount if you are diagnosed with a life-threatening or critical illness such as a heart-attack, cancer or stroke. Some policies will cover against serious injuries or loss of limbs or mobility. Again, the money can be used for anything.

With both products, you choose the amount of cover you need and how long you need it for, and premiums can be paid monthly or annually.

Do I need both?

Many people mistakenly believe it’s a choice of one type of cover or the other. However, many products on the market offer a combination of the two. With some insurers, such as Legal & General, critical illness cover can only be bought after life insurance has been taken out.

It’s important to remember the two products offer different reassurances.

“Those with young families and/or outstanding mortgages may be inclined to look to life insurance first to ensure their loved ones are supported in the event of their death. Critical illness gives a much needed financial boost to those going through a period of serious ill health, possibly taking some pressure off having to maintain earnings when it is very difficult to do so,” says Jody Baker, head of life insurance at comparethemarket.com.

Which is the more expensive cover?

By its nature, critical illness is more expensive, which reflects the higher claims rates compared with life insurance. But many factors will affect how much you pay including your age, health and occupation.

“You will be in a position to pay less if you are a non-smoker and have a strong medical record, but if your work is physical or potentially dangerous then your premiums will be higher than if you have an office job,” says John Hyde, managing director of Legal & General Insurance.

At what age should I consider buying either cover?

This will depend on your individual circumstances, for example if you have a mortgage, or children. But one point of consistency is cover will be cheaper the earlier it is taken out and the younger the policyholder is.

“While this type of cover might not be high on the agenda of most 20 and 30 year olds, the cost of both types of cover for these age ranges will only get more expensive as one gets older,” says Baker.

How do I know how much cover to take out?

For life insurance, think about whether you need level or decreasing term cover.

As the name suggests, level cover is when the amount of cover remains the same throughout the term of the policy. You decide the term – i.e the length of time the pay-outs last. For example, if you take out a policy for £150,000 then your insurer will always have to pay out the full £150,000, even if you die 24 years into 25 year term.

With decreasing term cover, the pay-out falls by a certain percentage each year.  The exact percentage will depend on the terms of your policy. This type of policy is usually taken out to cover a mortgage, which is likely to shrink over the years as you pay it off. Premiums for decreasing cover are cheaper than for level cover.

For critical illness, consider what cover you already have to make sure you’re not “over-insured”.

“If you’re employed, your benefits package may already include some form of income protection. Also consider any savings or other form of income you could use towards costs and add together your personal loans, mortgage and credit card debts. Then add the expenses you want your insurance to cover and once you’ve worked out these two figures, take away the cover you already have from the total amount you need and the result is the amount of cover you should take out,” says Hyde.

There are some useful calculators online – such as this one – to help you work out how much cover you’ll need.

Where can I buy life insurance and critical illness?

The easiest way to compare prices is using a price comparison website. It’s worth taking the time to compare products, especially with critical illness as some policies will be broader than others.

“Statistically, the majority of claims will always come from the core illnesses all polices include, cancer, heart attack and stroke, so while a more expensive product may look better because it has more illnesses covered, question whether it is really worth the extra cost to you,” says Baker.

In some instance you will be better off going through a financial adviser or broker to buy your cover, for example if you have a pre-existing medical condition.

An adviser can take a holistic view and work out where the risk lies within a household.  They can also give advice on whether the money should be paid into a trust, which would ring-fence it against inheritance tax.

Tom Conner, director at financial advice firm Drewberry, says: “Another benefit of having the money in a trust is that the trustees can access it right away rather than having to wait and go through probate.”

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