Critical illness cover: what it pays out for, and what it doesn’t

“If I get cancer, does my critical illness policy pay out?” It is one of the questions we are asked most about protection, and the honest answer is: usually, but not always, and the difference is in the wording.

Critical illness cover pays a tax-free lump sum if you are diagnosed with one of the conditions the policy lists and your diagnosis meets the policy’s definition of it. That second half is where most of the misunderstanding sits.

What critical illness cover is for

It is there to give you time and choices while you are ill or recovering. People use the money to clear or reduce a mortgage, replace a partner’s income while they take time off to help, adapt the home, or simply take money worries off the table during treatment.

It is not the same as income protection, which pays a monthly income if you cannot work for any medical reason, and it is not the same as life cover. We set out how the three fit together in our guide to the cover most families skip.

What it typically pays out for

Every policy covers the three conditions most people have in mind: cancer, heart attack and stroke. Beyond those, policies list dozens of others, such as multiple sclerosis, kidney failure, major organ transplant and Parkinson’s disease.

The Association of British Insurers publishes minimum standard definitions for the most common conditions, so the core wording is broadly comparable between insurers. Many insurers go further than the minimum, and that is where policies start to differ.

Why a diagnosis is not always enough

A policy does not pay on the name of an illness. It pays when the illness meets a defined level of severity. Three examples of how that works:

• Cancer: the full payment usually needs the cancer to have reached a certain stage. Some early-stage cancers and some skin cancers are excluded from it.
• Heart attack: the definition usually needs specific medical evidence, not just a hospital admission for chest pain.
• Stroke: usually needs evidence of lasting symptoms. A transient ischaemic attack (a “mini stroke”) is normally excluded from the full payment.

This keeps the full payout for the illnesses that change your life, and keeps premiums affordable. But it means the number of conditions on a policy tells you very little on its own. The definitions matter more than the length of the list.

Partial payments

Many policies now pay a smaller sum for less severe conditions, such as some early-stage cancers, often a percentage of your cover up to a cap. Whether a policy includes these, and how generous they are, is one of the more useful differences between insurers.

The survival period

Most policies require you to survive a short period after diagnosis, commonly 10 or 14 days, before they pay. Where the cover is combined with life insurance, the life cover would pay instead.

The traps worth knowing about

Not telling the insurer everything

The most avoidable reason a claim fails is that something was not disclosed when the policy was taken out: a GP visit, a test result, a family history question answered from memory. Answer the application questions carefully and fully, and check the answers if someone else filled in the form for you.

Combined cover only pays once

Critical illness cover can be added to a life policy, often for less than two separate policies. But a combined policy pays out once, on whichever claim comes first. After a critical illness claim the life cover has gone too, at exactly the point it would be hardest to replace.

Reviewable premiums

Some policies have premiums the insurer can review, and increase, during the term. Guaranteed premiums cost more at the start but cannot change. A cheap quote with reviewable premiums is not always the cheaper policy over twenty years.

Decreasing cover

Decreasing cover falls over the term, usually in line with a repayment mortgage. It is cheaper and suits mortgage protection, but on its own it leaves nothing for the household spending the payout might also need to cover. It doesn’t have to be one or the other: many insurers let you add level cover for the extras, such as childcare costs, on the same plan, so that part is there in full from day one.

How much cover do you need?

Enough to give you time and choices. A common starting point is clearing the mortgage and other debts plus one to two years of household spending, but some people choose a smaller sum to keep the cost down. Our life insurance calculator suggests a critical illness figure built from your own numbers.

What drives the cost

Your age, health and smoking status, the amount and term of cover, whether premiums are guaranteed, and whether it is combined with life cover. Critical illness cover usually costs noticeably more than life cover for the same amount, because a claim during a working life is more likely.

A sensible place to start

• Check whether your employer provides critical illness cover as a benefit. Some do, many do not.
• Dig out any policy you already hold and read its definitions for cancer, heart attack and stroke.
• Check whether it is combined with life cover, and whether the premiums are guaranteed.
• Then decide whether the amount still fits your mortgage and household.

It is not unusual for that review to show that what you already have is adequate.

If you would like to talk it through before deciding, the first conversation is free and carries no obligation. You can read more about our protection and insurance advice in Kent and how our charges work.

Questions we are often asked

Is a critical illness payout taxed?

For a policy you own personally, the lump sum is normally paid free of income tax and capital gains tax.

Can I claim more than once?

Most policies end after a full claim. Some pay smaller amounts for less severe conditions without ending the policy, and a few allow further claims for different conditions. The policy terms set out which applies.

Does critical illness cover include children?

Many policies include children’s cover at no extra cost, usually paying a smaller sum if a child is diagnosed with a covered condition. The age limits and amounts vary between insurers.

Should critical illness cover be written in trust?

It can be, but many people prefer the critical illness payout to come to them, since they are the one who is ill. Where cover is combined with life insurance, a trust can be set up so the critical illness benefit is paid to you and the life benefit to your beneficiaries.

The information on this page is for information purposes only and does not constitute individual financial advice. Policy terms, definitions and exclusions vary between insurers. Tax treatment depends on individual circumstances and may change in the future.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION ADVICE.