Repayment of mortgage with critical illness insurance ?
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.
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