By Matthew Horan CeMAP · Protection
Quick answer: Critical illness cover pays a tax-free lump sum if you're diagnosed with a serious illness that's listed in your policy, such as certain types of cancer, a heart attack or a stroke. Many people use it to pay off or reduce their mortgage, or to cover costs while they recover. It doesn't cover every illness, and the definitions vary between insurers. Clarity Mortgages & Protection in Altrincham gives fee-free advice on mortgages and protection together, with no obligation.
Life insurance pays out if you die. But what if you survive a serious illness and your life changes? You may need time off work, your income may fall, and the mortgage still has to be paid.
That's the gap critical illness cover is designed to fill. Here's how it works, where it falls short and how it can fit alongside your mortgage.
How critical illness cover works
You pay a monthly premium. If you're diagnosed with a condition that's listed in your policy, and it meets the insurer's definition, the policy pays out a lump sum. You can spend it however you choose: clearing some or all of the mortgage, replacing lost income, paying for treatment or making adjustments at home.
The key points:
It pays a lump sum, not a monthly income. Once it's paid, you decide how to use it.
It's usually tax-free when you pay the premiums yourself.
It covers listed conditions only. The most common claims relate to cancer, heart attack and stroke, but a policy can list many more.
The condition has to meet the policy definition. A diagnosis alone isn't always enough, as some conditions need to reach a certain level of severity.
There can be a short survival period. Some policies require you to survive for a set number of days after diagnosis before they pay.
The policy usually ends after a claim. If it's combined with life insurance, the policy typically pays out once.
What critical illness cover doesn't do
It's important to be clear about the limits:
It doesn't cover every illness or injury.
It doesn't pay out for time off work because of a condition that isn't on the list or doesn't meet the definition. That's where income protection comes in.
It doesn't replace your income month by month.
Pre-existing conditions you didn't declare can lead to a claim being reduced or declined. Our post on why life insurance claims get declined explains how to avoid this.
How critical illness cover fits with your mortgage
Many people choose critical illness cover to match the amount they owe on their mortgage, so a lump sum could clear it if they were seriously ill. Others take a smaller amount to help with the mortgage and other costs.
Things we look at together:
The amount. Should it match your mortgage, or be a smaller sum that fits your budget?
The term. Should it run as long as your mortgage, or end earlier?
Level or decreasing. A decreasing policy is generally cheaper and falls in line with a repayment mortgage. A level policy stays the same.
Alone or with life cover. Combining them is often cheaper than two separate policies, but a claim on one usually ends the whole policy.
If you borrow more or move to a new deal, the cover may need to change. Our post on checking your life insurance when you re-mortgage covers what to look out for, and our guide on which cover protects your mortgage compares all three types.
What affects the cost?
Your age and health
Whether you smoke
The amount and length of cover
Whether the cover is level or decreasing
How many conditions the policy covers, and how they're defined
Whether it's combined with life insurance
Critical illness cover costs more than life insurance, so it's worth thinking about what you most need and what you can afford.
Why definitions matter
Two policies can both say "cancer cover" but define it in different ways. One might cover earlier-stage cancers, another only more advanced ones. The same goes for heart attack, stroke and other conditions.
That's why comparing the wording, not just the price, is so important. We explain the differences in plain English, so you know what you're buying.
Frequently asked questions
What does critical illness cover pay out for?
A diagnosis of a condition listed in the policy, as long as it meets the insurer's definition. Each policy lists its own conditions.
Is critical illness cover worth having?
It depends on your circumstances, your budget and what you already have in place. It can be valuable if a lump sum would help your mortgage or finances, but it doesn't cover everything. We'll talk through your options.
Can I get it if I have a health condition?
Often yes, though it can affect the price or terms. Always answer the insurer's questions fully and honestly.
What's the difference between critical illness cover and income protection?
Critical illness cover pays a one-off lump sum for listed conditions. Income protection pays a monthly amount if you can't work because of illness or injury.
Do I need it as well as life insurance?
Not necessarily. Some people take life insurance only, some add critical illness cover and some add income protection. It depends on your needs and budget.
Does it cost anything to speak to you?
No. We don't charge a fee for our advice. We're paid by the provider if you go ahead.
If you'd like to know whether critical illness cover would help with your mortgage, get in touch. It's fee-free with no obligation. We help clients across Altrincham, Trafford and Cheshire.
About the author
Matthew Horan CeMAP is Principal of Clarity Mortgages and Protection, an independent, fee-free mortgage and protection broker based in Altrincham. He has over 10 years' experience helping individuals, families and business owners with mortgages and protection, and writes in plain English because most people aren't given the chance to understand what they're signing.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it.
This article is general information, not advice. What's right for you depends on your own circumstances. Protection policies may not pay out in all circumstances and have exclusions and limitations, so check the policy terms. Most protection policies have no cash-in value if you stop paying or the term ends.
