Life insurance and critical illness cover: Your complete guide

It’s all about protecting your loved ones.

Life insurance and critical illness cover serve as pillars of financial security for your loved ones during challenging times. Here, we discuss the benefits to each type of policy, and the key differences between them, to help you make the right choice for you and your family’s future.

Choosing life insurance and critical illness cover

When faced with a decision between choosing life and critical illness cover it’s only natural to feel uncertain. Often it can be difficult to know if you need life insurance, serious illness cover, or both.

On the surface, the policies seem to do the same thing. They both offer a lump sum or ongoing payments to your beneficiaries should the worst happen. However, there is one main difference.

With a life insurance policy, the benefit is paid upon your passing, ensuring your loved ones receive the financial support they need during a difficult transition. 

Critical illness benefits, on the other hand, are paid if you’re diagnosed with a specified critical illness, as outlined in your policy. This can include anything from a stroke or heart attack to certain types of cancer. A payout at this time can help you keep up with mortgage payments, bills, childcare, and medical invoices.

This comprehensive guide, combined with the expertise of our team and website resources, can help you determine the right coverage for you and your family.

What is life insurance?

Life insurance acts as a safeguard for securing your family’s future. It brings peace of mind that loved ones won’t endure financial hardship after you’re gone. By paying regular premiums, you’re essentially creating a safety net for them — helping to alleviate any concerns about potential debt, mortgage payments, funeral costs, and educational expenses. 

Life insurance payouts are usually tax-free, and no income tax or capital gains tax applies. However, in some circumstances, your estate may be subjected to inheritance tax, which may be deducted from any lump sum payment. Consider speaking with one of our independent financial advisers if you’re unsure how this could affect you and your family.

How does life insurance work?

With life insurance, you have the flexibility to tailor your amount of cover and the length of the policy. However, it’s worth considering that investing earlier in life will potentially yield a greater tax-free payout for your loved ones.

It’s also important to recognise that although you’re paying into life insurance each month, it’s not a savings plan. There is no cash value unless a claim is made and approved after you’re gone. It’s solely there as financial protection for you and your family in the event that something unexpected happens.

Who can purchase life insurance?

Life insurance is suitable for most people including:

  • Homeowners: Term life insurance can run alongside your mortgage. If you die within the policy term, your remaining mortgage will still be paid.
  • Business owners: A life insurance policy’s death benefit could be used to keep a small business going and continue to pay employees when you’re no longer around.
  • Parents: If you have dependents relying on you for financial support, life insurance ensures their protection should you pass away unexpectedly.
  • Children: A parent’s life insurance policy can also incorporate children. It pays out if the worst happens and a child passes away, or if a parent dies first. When your child reaches a certain age, they can transfer the existing policy into their name and take over the monthly payments.
  • Disabled: Having a disability doesn’t necessarily disqualify you from getting life insurance. However, the cost can be higher, as the risk is greater. An insurer will consider the type of disability and any current or past medical treatments before granting a policy.
  • Elderly: Seniors can also benefit from taking out life insurance. Even if many financial responsibilities are covered, you can still use a lump sum to care for a partner and spouse, pay any medical bills, funeral expenses, or leave a little gift for kids and grandkids

Types of life insurance to consider

There are different types of life insurance available, each designed for a specific purpose or scenario. Whichever one you choose comes down to your personal circumstances and the coverage you need. You can run more than one policy simultaneously.

Let’s look at some of the terminology:

  • Level term life insurance: This type of life insurance lasts for a set term or number of years and pays out if the insured person dies during the policy term. The level of cover and premium remains the same throughout the duration of the policy.
  • Decreasing term life insurance: This is a tailored policy that runs alongside long-term loans, such as a mortgage. It can ensure mortgage payments are covered when you’re gone, taking financial stress away from loved ones. Payouts reduce in line with your monthly mortgage or loan payments.
  • Whole of life life insurance: With whole of life cover, you select your policy duration and make monthly payments. Unlike decreasing term insurance, the payouts don’t reduce over time, they remain the same. Should you die during the term, your family members will receive a tax-free lump sum payout.

What is critical illness cover?

Critical illness cover can be helpful during times of health uncertainty. If you’re diagnosed with a serious illness, have to undergo a medical procedure in hospital, or need time off work to recuperate, this policy offers a tax-free payout, either in a lump sum or in the form of regular income to help cover your bills.

A payout can help alleviate financial burdens, whether you live alone or with family. The payment amount is calculated on the level of cover you purchased, giving you financial freedom when you need it most.

Do you need critical illness cover?

Whether or not you need critical illness cover really depends on your personal circumstances. If you’re self-employed without savings, or the company you work for doesn’t offer long-term sick leave, it may be beneficial to invest in a critical illness policy.

For example, should you be unable to work due to a serious illness diagnosis, you may expect your employee to continue to pay a monthly salary, or assume that you can claim government benefits to cover any shortfall. In reality, after a period of time — usually six months — employees are moved to Statutory Sick Pay which can be much less than a monthly salary. State benefits may also not be enough to cover financial commitments if you are unable to work for a while. 

You may not need critical illness cover if you have enough savings to cover outgoing expenses, if your employer has a benefits scheme, or if you have no financial commitments or dependents.

Which illnesses does critical illness cover?

Each critical illness policy is different, but most cover a variety of life-threatening or debilitating illnesses affecting adults and children. Although many common cancers are covered, some aren’t, or require additional cover. Here are a few common conditions covered in critical illness policies:

  • Certain types of cancers including breast, liver, bowel, lung, brain tumours (benign), spinal cord tumours (benign)
  • Strokes
  • Heart attacks
  • Organ transplants
  • Brain tumours
  • Multiple sclerosis
  • Paralysis
  • Blindness

Is there anything critical illness insurance won’t cover?

Typically, non-life-threatening cancers are excluded from critical illness cover policies. However, should one of the excluded cancers develop to be incurable or become metastasized, critical illness insurance may be payable if your premiums are up to date. Some skin, prostate, or breast cancers in their early stages may be eligible for a partial payout, too. This is generally because their size makes it possible to remove them surgically, and they can also be reduced through radiotherapy treatment. 

In certain circumstances, you may be able to start a critical illness policy after a cancer diagnosis, however premiums will be high and there will be exclusions for pre-existing conditions.

Critical illness insurance also doesn’t cover self-inflicted injuries or any illnesses deriving from drug or alcohol abuse. Additionally, insurers may not cover less severe medical conditions that don’t meet the policy’s criteria. It’s important to review the information your insurer gives you thoroughly to understand any exclusions or limitations, so there are no unpleasant surprises.

Is it worth buying critical illness cover?

Critical illness cover is worth considering, especially as you may become ill through no fault of your own. If you’re unable to work, the loss of income can create a huge level of stress. A tax-free payout during this time can help ease any financial pressure, allowing you to cover loans and bills, including medical costs.

You may even wish to insure little ones with children’s critical illness cover. If you’re unsure if your income will cover the costs, it’s a good idea to speak to an independent financial adviser to assess your affordability before you commit.

Are terminal illness and critical illness cover the same thing?

There are key differences between terminal illness and critical illness insurance cover. Terminal illness coverage applies to untreatable conditions with a life expectancy diagnosis of 12 months or less. Critical illness cover provides a payout for serious illnesses, or conditions you’re currently experiencing. You can acquire critical illness insurance as either a standalone policy or as an addition to your life insurance, whereas terminal illness cover is often already bundled with life policies.

How much is life insurance and critical illness cover?

Life insurance is tailored to an individual’s needs; therefore, no policy will be the same. The cost of personalised life insurance can depend on different things, including:

  • Your age and health: Insurers base their calculations on risk factors, therefore the older you are the greater your chance of developing health problems. This risk will increase your monthly premiums. Investing in a policy in your 20s, when you’re in good health, equals lower monthly payments.
  • Your lifestyle: Insurance costs can also be affected by your lifestyle. Insurers charge higher premiums for smokers, those who participate in adrenaline sports, or those who are overweight. This is because they fall into a higher risk category. 
  • Length of policy: The longer you pay into your life insurance policy, the cheaper it becomes as you spread the costs over an extended period of time. Most policies cover a term of between five to 25 years or longer depending on your individual situation.
  • How much cover you need: Life insurance cover is calculated on your personal circumstances. If you have debts, healthcare costs, or a mortgage, you may require insurance to cover all of these should the unforeseen happen. Your monthly payments will be higher or lower depending on your circumstances.

Should I get critical illness cover with life insurance? 

Many insurance companies offer the option to purchase life insurance with critical illness cover, merging them into a single product for an extra cost. However, it’s important to understand that a bundled policy will only pay out once, prioritising either illness or death — it doesn’t cover both. Choosing separate life and critical illness insurance policies, each paid for individually, guarantees comprehensive coverage for all potential scenarios.

Whether it’s life insurance, critical illness cover, or a combination of the two you seek, the goal remains consistent: safeguarding the financial security of loved ones when you’re no longer around. Our dedicated team can offer personalised guidance and support, helping you find a suitable solution that aligns with your needs and preferences. Contact us today.

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