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Do I Need Critical Illness Cover?

Critical illness cover is an insurance product which pays a lump sum in case of serious illness (such as cancer, heart attack or stroke). It does not pay out if you die, which is how it differs from life insurance. It is very common for insurance companies to sell critical illness cover together with life insurance, but you can also get it on a standalone basis. Is critical illness cover worth it? As with any other kind of insurance, there is not a universal answer. The following should help you find out whether critical illness cover is worth it in your particular case.  

Three Questions

When deciding about critical illness insurance there are three questions to ask:

  • How likely is a serious illness in your case?
  • How severe would the consequences be for your finances?
  • How much would critical illness insurance cost in your case?

Your Age and Health

In general, the probability of becoming critically ill depends on your age, family history, health and lifestyle. When you are young and healthy, the risk is very low (although it’s never zero). The older you get, the higher the risk. Critical illness is also more likely if your lifestyle is unhealthy (e.g. you are overweight, smoke or drink excessively) or if your parents, grandparents or other relatives have had a serious illness.  Evaluating these factors will help you answer the first of the three questions.

Critical Illness Insurance Cost

Insurance companies use complex models to calculate premiums, with the factors above (e.g. age, health or family history) as inputs. As a result, your answers to the first and third question will always be in conflict. If your risk of becoming seriously ill is higher and you would find critical illness insurance useful, you will also find the premiums higher and vice versa. Therefore, the most important of the three questions is the second one. Your financial situation, income, savings and liabilities should be the main factors when deciding whether you need critical illness insurance.

Your Life and Financial Situation

Try to imagine how your finances and monthly budget would change if you became critically ill or injured.  You might be less fit or unable to work, and your living costs might increase at the same time (for example, you might need wheelchair access to your home or car). The following factors make you more likely to need critical illness cover:

  • You have very limited savings.
  • You have a mortgage or other liabilities.
  • You have children or other people dependent on your income.
  • All or majority of your regular income requires you to work full-time.

The following factors make critical illness insurance less important:

  • You have savings high enough to cover your expenses in an emergency.
  • You have passive income, such as rental property, royalties or dividends.
  • Your spouse earns a high income.
  • You live in your own property without a mortgage.

Pay Attention to the Small Print

When considering a particular critical illness insurance plan, it is extremely important to read the small print – the detailed terms and conditions. A list of illnesses and injuries covered by the plan is not enough on its own. For each of them, there will be details specifying how severe it must be and how exactly it must be diagnosed in order for a claim to be successful. For example, practically every critical life insurance plan covers cancer, but some cancer types are excluded and many others are only covered when they reach a certain degree of severity.

Part of Your Financial Plan

When deciding whether you need critical illness insurance, do not think about it in isolation, but as a part of your entire financial plan and just one possible tool to manage your financial risks and achieve your goals.

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