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Do You Have Enough Life Insurance?
I know life insurance isn't a cheery topic, but it's important for you to appreciate the risks of under-insuring yourself. Most critical illness cover is sold as combined cover with life insurance because buying it that way is cheaper than buying two separate policies. The problem is that wrapping different types of cover up into one neat plan can give you less cover than you think - and less than you need.
The principle to understand is that when you buy a combined life and critical illness policy - you're normally only able to make one claim. So if you make a claim for critical illness, the policy stops. This means that you immediately lose the life cover which was bundled into the same policy.
Worse still, if having made a critical illness claim the odds are that you would be refused life cover and if you were lucky enough to be offered cover, the cost would be horrendous! But if you had bought separate critical illness and life insurance policies, you can make a claim on your critical illness policy without having any affect on your life policy. This enables you to make a claim for critical illness and a separate claim can be made for your death.
Incidentally, most life policies also include what's called terminal illness cover. This means that if you are diagnosed with an illness from which you are expected to die within twelve months of diagnosis, the life policy will pay out on diagnosis. The other technical point to be aware of is that all critical illness policies have something called a "survival period". This means that after you are diagnosed with a critical illness, you have to live for at least X days, X being the survival period. Many insurance companies have set the survival period at 14 days but others have adopted 28 days.
So should you choose a combined policy or should you pay more for the comprehensive protection provided by two separate policies? For many the choice comes down to cost. So let's take at look at how much the alternative options could set you back. Let's look at plans to provide 100,000 pounds of cover over 25 years for a non-smoking, healthy man, aged 30. The premiums are guaranteed too, so they fixed for the full 25 years.
For a combined life and critical illness policy the cost was 23 pounds 80 pence a month. For separate policies, the monthly cost for life cover was 6 pounds 34 pence and 23 pounds 90 pence for the critical illness policy - that a combined monthly cost of 30 pounds 24 pence. This means that separate policies would cost me 27 per cent more than a combined policy.
But there is another way to look at it. Let's say you take out a combined plan with 250,000 pounds worth of cover. If you made a claim for critical illness you'd receive a lump sum for this full amount and you might use this money to repay your mortgage. Therefore, if you died during the policy's term you might not need as much life insurance as you've already repaid your mortgage. (But don't forget, your estate may still need cash to clear other debts, pay for care for your children etc.)
In other words, one critical illness payout of 250,000 pounds may be sufficient to provide full protection regardless of whether the claim is made for death. But you need to be aware that there are gaps in your protection. For example, if you died in an accident, the critical illness policy would not pay out and critical illness policies do not always cover all critical illnesses - you need to check this out. Also you might contract a critical illness and die inside the survival period, I referred to earlier. This would also mean that the critical illness policy would not pay out. To me, so long as I could afford the extra cost, I'd go for two separate policies as it give me total peace of mind.
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