Critical Illness vs Permanent Health Insurance

stayathomedad_2

I am no longer a stay at home dad. I am 35 with two children and my wife earns a similar amount to myself.

Our current life insurance only really covers our mortgage and I have been doing some maths to work out the loss of income to the family should one of us die. It has basically proven that we need way more cover than we currently have, about 2.5 times as much and I am going to sort this out really quickly.

I then started to think about critical illness and have worked out that even though we only plan to only work for about another 20 years we would lose masses of income if we had a critical illness in the near future, recovered and couldn't/didn't want return to work. The sort of quotes I have been getting is about £200 per month over 20 years.

The alternative would be to get permanent health insurance to cover part of our income up to the age of 55, this would cost about £50 per month.

As I see it the benefits of critical illness policy is that if you get one of the listed critical illnesses and you have insured all your future income you get a lump sum and you therefore don't have to return to work if you didn't want to i.e. if the stress of your job contributed towards a heart attack.

Permanent health insurance seems to be better value for money but I assume that in the above example if the doctors said you were fit enough to return then the policy would stop paying even if you thought stress was a contributing factor or your brush with serious ill health made you want to retire early.

I have no handle for the probabilities of getting a critical illness before age 55 vs the probability of needing income protection. As a civil servant I am currently covered 6m full, 6m half for sickness and would probably get some early pension benefits if I had to take early retirement on ill health grounds.

I am hedging towards covering my mortgage plus 3 years salary on critical illness rather than permanent health insurance. Does this seem a reasonable course of action?

bigal-

Unfortunately there is no right or wrong answer with with this type of insurance. It really comes down to your attitude towards risk, health status, age, lifestyle, etc, etc.

With critical illness the pro is really just the one-off lump sum payment and the ability to clear the mortgage, give up work, pay for house adaptations, blow it on a special holiday, etc. The potential downsides include the very high cost, the risk that a condition may not be one of the specified critical illnesses, and bizarrely that in many cases you actually have to survive for 28 days after diagnosis in order to claim.

I would have said income protection would be far more likely to pay out because you could suffer from any illness/injury that limits your ability to work, including stress (this would not be a valid claim for a critical illness policy) and not be forced to have one of the narrow range of conditions listed in the policy booklet. Even more perversely, you could feasibly be in a position where part of you would be hoping the illness is 'severe enough' to qualify for the CI payout. Just getting the big C isn't usually enough, it has to be right (or wrong) type/stage.

Surprisingly, however, according to Aviva there's not much difference in the payout ratios for income protection vs. critical illness - but I wonder how representative or accurate this actually is.
aviva.co.uk/media-centre/story/17126/aviva-pays-nearly-half-a-billion-pounds-in-protect/
- they also say the average payout term for income protection is +9 years so you can do the math with your own earnings/mortgage balance etc

With permanent health insurance, or income/earnings protection, the policy is obviously much cheaper for an equivalent sum assured because it will pay a monthly income until retirement or age 60/65, which ever comes first.

I personally opted for income protection because I wanted to keep the costs as low as possible. With some careful planning it's possible to make sure the policy isn't overly limiting - for example...

- Check if it is "own occupation" or "any occupation" cover ("own" is better for you - "any" means they can in theory ask you to do ANY work that you are physically capable of doing)
- Make sure it's a 'guaranteed premium' policy and not 'reviewable' or similar wording as the premiums will start low but then increase significantly every few years
- You can minimise the cost further by tying the deferred period back to 12 months to coincide with your employer's scheme - the policy normally limits your total income anyway (from the policy + other sources) to aronud 60% of your pre-claim income, so there is no point in paying a premium to have the policy pay out while you are receiving your employer's sick pay scheme.
- 'Increasing' cover will increase with inflation every year (both monthly premiums & payout) while the cheaper option will remain level throughout

I would recommend Cavendish Online as a good source of DIY policies (no connection other than a satisfied customer). Do not whatever you do buy from a bank or insurer without checking there first.

Also have a think about 'decreasing' cover - the sum assured will reduce over time so the longer the policy lasts before paying out, the smaller the payout would be. But it's a nice happy medium as it will always be sufficient to clear the mortgage and leave a little bit extra to play with while being significantly cheaper than 'level' term.

InsideInsurance

bigal- wrote: »

Surprisingly, however, according to Aviva there's not much difference in the payout ratios for income protection vs. critical illness - but I wonder how representative or accurate this actually is.

http://aviva.co.uk/media-centre/story/17126/aviva-pays-nearly-half-a-billion-pounds-in-protect/

- they also say the average payout term for income protection is +9 years so you can do the math with your own earnings/mortgage balance etc

What ratio are you considering? There is only stated the claims acceptance rate and the amount paid. It doesnt give a population size or total exposure to really give any meaningful analysis of ratios. Whilst payouts are similar their CI book may be 10 times the size of their PHI

The interesting thing was that the average age of claim was 55 for PI -v- 46 for CI (men). The 9 years and 5 months would also equate to the policy on average maxing out given 55 + 9.5 = 64.5 and most will terminate at 65 (the average age of "55" could well have been + a few months to explain the shortfall).

Likewise psychiatric issues are by far the most common for PI but cancer for CI. Given most cancers of the severity needed to claim a CI would result in time off work for treatments etc I do wonder if the stats are skewed by the types of customers for each products and relative commonality

stayathomedad_2

Thanks for the replies. The aviva link contains some interesting info.

I have found some risk calculator websites that seem to suggest that a 35 year old male has about 30% chance of getting a critical illness by 65 but it drops to just under 20% if only considering a policy up to age 55.

I found one website that seems to suggest that there is approx 6% of having to take early retirement due to ill health but I am not sure about the source of their data.

Is there anywhere I can find the probability of needing to claim on an income protection policy for longer than 12 months prior to the age of 55.

I have read some info talking about a risk reality tool developed by LV but it doesn't seem to be available to the public.

PeacefulWaters

I prefer income protection, specifically PHI.

If I'm ill longer term, I lose my income. Replacing it is important. PHI does that.

With critical illness I get a lump sum. This may be too much to replace income if I get back to work sooner, or too little if I can't work again.

I'd suggest CI is oversold and PHI undersold.

magpiecottage

PeacefulWaters wrote: »

I'd suggest CI is oversold and PHI undersold.

Absolutely.

The biggest problem is not the size of the lump sum, though. It is meeting the claim requirements.

PHI simply requires that you are too ill to work. It does not matter what the illness is.

CI requires that you have an illness specified in the policy. It must be the exact illness, not something that has similar symptoms but a different name or the right illness but not sufficiently severely.

If I had a choice of defending a complaint that somebody had purchased PHI but now they have claimed they realise they would have been better off buying CI or somebody who had bought CI now wished they had bought PHI. I would take the former every time. The latter will arise because a CI claim has been refused and the complainant has found themselves with bills to pay and no income.

stayathomedad_2

I have now discovered family income benefit. I am going to get this type of cover because I don't think my wife would be able to manage investing and making a lump sum last into retirement so this takes all that away.

I am going to get own occupation income protection for myself with a 12 month deferment because my work will cover first 12 months.

The problem I have with my wife is that she is a secondary school teacher and her subject is dance. If I put teacher or even worse dance teacher into the income protection quotes the prices are really high.

One question I had with family income benefit and income protection is if I want he payout to increase with inflation does this mean premiums will go up with CPI, RPI or one of these plus a %? Or if it's says guaranteed will the premiums already have inflation assumptions built in?

As civil servants our pay increases look likely to be restricted in the future to 1% or less than CPI target of 2%.

PeacefulWaters

A couple of other thoughts to contain premiums.

1. How long will your employers pay you for? A longer deferment period on PHI will cut premiums.

2. Do your employers pay a lump sum on death? This could reduce the amount of life cover needed (but should be reviewed on employer change).

3. What pension benefits will be paid in the case of serious illness or death? This could further reduce the level of cover needed.

Usually I'd say ignore employer benefits as they can be changed. But if you are trying to keep costs low ...

stayathomedad_2

I realise that my questions are now getting very specific but seeing as the brokers are closed for the weekend I thought I'd throw this one out there:-

I am looking at Friends Life family income benefit with an indexation fixed at 3% per year. If the indexation is fixed at 3% for the term they should be able to work out a guaranteed premium for the term rather than the default situation of increasing premiums by 3% each year. Will they be able to offer this?