Critical illness cover (CIC)
Critical illness cover is a relatively recent development that has rapidly become popular. It has developed mainly because advances in medical science mean that people are surviving longer after diagnosis of serious illness. Consequently their standard of living would usually be seriously impaired if their earning capacity reduced or disappeared as a result.
Critical illness policies pay a lump sum on the diagnosis of any of the conditions or diseases specified in the policy, regardless of whether or not that illness subsequently prevents the life assured from working. It is not material if the life assured recovers completely from the illness; the trigger for paying out is the diagnosis of the disease. If, however, the life assured subsequently dies from the disease, the sum assured is not paid out again.
CIC can be a stand-alone policy or may be added as a rider to a policy providing death cover. This is where it is most valuable in protecting a mortgage. It could be added to a term assurance or endowment policy connected to the mortgage loan and, if the assured contracts one of the specified illnesses, the policy pays out and the loan can be paid off. This allows the assured to avoid the worry of being unable to afford the mortgage repayments while seriously ill from one of the specified conditions.
The claimant normally has to survive for a period of 28 days after diagnosis before the CIC benefit pays out. If the claimant does not survive this period, what happens depends on whether the CIC is stand-alone or a rider to a term or endowment policy. If it is a stand-alone policy, nothing is payable; if it is a rider, the term assurance or endowment sum assured is paid.
Not all illnesses are covered by the terms of a CIC policy and each insurance company has its own list of illnesses covered in the policy document. Typically, the list includes the following:
- heart attack;
- stroke
- cancer
- surgery for coronary artery disease;
- major organ transplant;
- kidney failure;
- Alzheimer's disease.
Some insurers also include:
- paraplegia or paralysis;
- loss of limbs;
- multiple sclerosis.
Invariably, AIDS or the diagnosis of HIV is specifically excluded from cover.
In addition, each insurer defines the exact medical circumstances in which it will pay benefits on diagnosis of one of these illnesses. For example, an insurer will usually not pay benefits on the diagnosis of a minor stroke and the policy terms will state the minimum criteria under which diagnosis of a stroke will prompt payment of benefits.
Many CIC policies also include permanent total disability (PTD) cover. This is where the policy pays out if the assured is permanently disabled from performing any occupation. This is a useful catch-all for diseases and conditions not specifically covered in the other policy provisions (HIV and AIDS will, however, still be excluded).
Critical illness cover is a useful addition to all policies being used in connection with mortgage repayment. However, as it is essentially a broadening of cover, it may be refused to an individual proposer or only available at an extra premium on medical grounds, even though they can be offered death cover at ordinary rates.
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