Critical Illness Reviews

The most common answer to this is the guaranteed immediate annuity, which is payable for a fixed number of years and thereafter until critical illness. The payments continue for the specified period whether the annuitant lives or not, and if he dies the money will be payable to whoever he has named in his will. The amount of the annual payment per £1,000 of purchase money is of course lower than for a non-guaranteed annuity.

Under a capital-protected immediate annuity, there is a guarantee that the total gross installments payable will not be less than the purchase price of the annuity. In the event of critical illness before the full amount has been received, the balance is generally payable as a lump sum.

Very often, of course, it is a married couple who are seeking to augment their retirement income. In this case the most suitable alternative is usually the immediate joint critical illness insurance. Here, payments continue until the second partner has contracted a critical illness, and the rate of payment will depend on the partners’ ages (more rarely used is the joint life cover, where payments cease on the first claim). Such critical illness insurance annuities are, of course, even more vulnerable to inflation and the survivor may be left with a quite inadequate income. So care is necessary in making such an arrangement.

The problem of inflation can be partly surmounted, but only at the expense of the original income. Some offices offer increasing annuities, where the annual payment increases by a fixed percentage or amount each year. Provided the annuitant is prepared to sacrifice part of the original income and expects a long life, this may be a worthwhile alternative to the ordinary annuity method.

Because a considerable period has to elapse before escalating annuity installments will match those which would have been available under a level annuity, it is often preferable to buy the smallest acceptable level annuity and to retain capital which can be used to buy further policies later, when the purchaser is older.

Other innovations of more use to the critical illness insurance policyholder concern the alteration in the terms of the policy to take account of moving house. It is obviously desirable to have the option to increase the sum assured without medical evidence so that an additional critical illness insurance policy can be added when a larger house (and loan) are acquired. One alternative is the option to extend the term of the original critical illness insurance policy so that its increase in value can repay a larger loan. (Such an extension, incidentally, is contrary to an old tenet of actuaries that contracts may be shortened but never lengthened because of the extra risk to the company involved in lengthening a contract. You can always convert a critical illness insurance policy, thus shortening the term, but you cannot normally do the reverse.)

While flexibility is useful, the company’s bonus record is probably of greater importance. Any contract you choose is guaranteed to repay the loan on the occurrence of a life threatening illness and conservative bonus assumptions mean it is as good as guaranteed to do so at maturity. But the surplus that emerges over and above this will depend on the company’s investment success over the period. It does not make a great deal of sense to select a critical illness insurance policy simply because its monthly premium is 50p below that of its competitors. One of the reasons for buying a critical illness insurance policy is its investment merit, and so the selection of a company with a good investment record should take priority over small cost differentials.  

It is also worth noting that any existing critical illness insurance policies you already have may be tailored to repayment of a loan. Many companies will allow you to “trade-in” your old policy against a new one of the right type for the repayment of the loan you want, and the surrender value of the old one. Thus, the purchase of critical illness insurance can be more than just the protection of your health.

There is another category of critical illness insurance policies especially designed for children. These are deferred assurances and are known by names such as junior critical illness insurance policies or juvenile critical illness insurance. The parent takes out a critical illness insurance plan on his or her own life to mature when the child is 18 or some other specified age. At this age the parent then has the option of taking the cash sum provided by the policy (on the child’s behalf), or the child may continue to pay premiums at the same or a higher rate for a with-profit critical illness insurance policy.

If the parent dies or contracts a life threatening illness before the option age is reached, premiums may cease until the child reaches the appropriate age when the options are still available. An income benefit may as well be paid during this period. Since the critical illness insurance policy is, at the outset, on the parent’s own life, tax relief is available on the premiums, and when the child takes over the policy it, too, will obtain tax relief within the usual limits.

If the child opts to continue the critical illness insurance policy, premiums continue at the same or higher rate regardless of what type of policy is chosen, but the sum assured will vary according to the type of policy and its term. What is happening is that the accumulated sum is being used to augment the benefits on whatever type of critical illness insurance policy is chosen, so that the total sum assured provided for the annual premium will be far higher than that under the company’s normal scales. Normally, the premium rates (and hence the benefits) at the option date are guaranteed when the policy is first purchased.

Critical illness insurance for children can let parents have a sigh of relief. They will have the peace of mind that everything will be fine should their children happen to fall critically ill. So, choose the appropriate insurance which will give you such benefits.