Life insurance vs./and/or critical illness cover

Burnsie1983

I’m a 42-year-old white male with no diagnosed health conditions (other than dry eyes). There’s nothing I’d need to tick “yes” to on a medical form. I’m a healthy weight for my height… I’ve even got abs for the first time since my teens. I don’t smoke, don’t use recreational drugs, and drink very little alcohol.

I live alone, I don’t have children, and I don’t have any dependants. If I drop dead tomorrow, the bank can have the house - no one will be financially affected.

I currently pay £30 a month for critical illness cover which, if I became seriously ill and was unable to work, would give me a lump sum covering around half of my mortgage.

I’ve recently applied to increase my mortgage slightly for some home renovations. During that discussion, I looked at extending the critical illness cover to pay off the full mortgage if I couldn’t return to work due to ill health. The quote for this came back at £67 per month.

Being a tight Yorkshireman, I’m keen to make sure I’m getting the best deal,  but I’m a bit naïve when it comes to insurance. I mentioned all this to a friend (a committed pessimist), and he said his life insurance pays out a lump sum if he’s diagnosed with a terminal illness. I’m assuming that’s the key difference: life insurance pays out if you’re terminally ill or die, whereas critical illness cover pays out if you get a serious condition that stops you working, even if it’s not terminal.

The issue I’m finding is that comparison sites seem to steer everything towards life insurance, which, as I understand it, pays a lump sum when you die or are diagnosed as terminal which not the same as what I’m looking for.

Any advice or pointers would be really appreciated.

Aretnap

Burnsie1983 said:

whereas critical illness cover pays out if you get a serious condition that stops you working, even if it’s not terminal.

That's permanent health insurance, which parts a monthly income if you are to ill to work, for whatever reason. Personally I would rank it above either life or critical illness cover in terms of importance in your situation.

 Critical illness cover pays out if you get one of a pre-agreed list of health conditions of specified severity, regardless of whether they do you working. You could have a heart attack, get a big lump sum, have a stent fitted and be back at work in a few months. Or you could be off work for years or decades with a less "sexy" condition that isn't on the critical illness list, and get not a penny. Two of the big ones which are typically not covered by critical illness cover are mental health conditions (stress, anxiety,depression etc) and musculoskeletal problems (arthritis, back pain etc). Both would be covered by PHI, assuming not excluded as pre-existing.

It's possible to buy CIC as a stand alone policy if that's what you want, but it is commonly sold alongside life insurance. If you have no dependants then you don't actually need life insurance, but the cost of including it on a critical illness policy is often pennies or even zero, in which case there's no real reason not to add it if there's any possibility that you might need it in future (maybe there is a lady out there...).

Burnsie1983

Aretnap said:

Burnsie1983 said:

whereas critical illness cover pays out if you get a serious condition that stops you working, even if it’s not terminal.

It's possible to buy CIC as a stand alone policy if that's what you want, but it is commonly sold alongside life insurance. If you have no dependants then you don't actually need life insurance, but the cost of including it on a critical illness policy is often pennies or even zero, in which case there's no real reason not to add it if there's any possibility that you might need it in future (maybe there is a lady out there...).

Ive found the opposite. Life insurance is cheap as chips, but add in >£60+ CI, then goes up quickely.

But then there is "income protection insurance"...which I can get for cheaper...but it looks like the only diference is it's not a lump sum! 

Aretnap

Burnsie1983 said:

Aretnap said:

Burnsie1983 said:

whereas critical illness cover pays out if you get a serious condition that stops you working, even if it’s not terminal.

It's possible to buy CIC as a stand alone policy if that's what you want, but it is commonly sold alongside life insurance. If you have no dependants then you don't actually need life insurance, but the cost of including it on a critical illness policy is often pennies or even zero, in which case there's no real reason not to add it if there's any possibility that you might need it in future (maybe there is a lady out there...).

Ive found the opposite. Life insurance is cheap as chips, but add in >£60+ CI, then goes up quickely.

But then there is "income protection insurance"...which I can get for cheaper...but it looks like the only diference is it's not a lump sum! 

That's what I meant. Critical illness cover pays out much more often than life insurance does (people get seriously ill more often than they die young) so it costs a lot more. Hence if you're buying CIC, it often makes a negligible difference whether you buy it with or without life insurance tagged on to it.

There are a number of differences between income protection and CIC; most notably:
1. Income protection pays out if you are too ill to work for any reason: CIC only pays out if you get one of the conditions on the list (which is by no means exhaustive of all the things that could make you too ill to work)
2. As you say CI pays a lump sum; IP pays a monthly income (which can be worth a lot more than the lump sum when you consider how long you can be off work sick: the average claim length is something like eight years.)

Just make sure you're looking at the full fat version of income protection which will continue to replace your income until you reach retirement age if necessary. Not the Diet Coke version, where any claim is capped at one or two years income, after which you're on your own if you're still to ill to go back to work.

dunstonh

Life insurance is cheap as chips, but add in >£60+ CI, then goes up quickely.

It would do.  You are more likely to claim on CIC than life assurance.

But then there is "income protection insurance"...which I can get for cheaper...but it looks like the only diference is it's not a lump sum! 

Depends on what you mean by income protection.
There is the PPI version of income protection which is pretty useless much of the time.
Then there is the PHI version of income protection which is much better but the policies can be pretty much placed into budget, standard and comprehensive levels.  Those are not official classifications but you can effectively split them that way.  Budget end ones are nearly as useless as PPI.   Standard and comprehensive levels are much more likely to be suitable.

Burnsie1983

dunstonh said:

Life insurance is cheap as chips, but add in >£60+ CI, then goes up quickely.

It would do.  You are more likely to claim on CIC than life assurance.

But then there is "income protection insurance"...which I can get for cheaper...but it looks like the only diference is it's not a lump sum! 

Depends on what you mean by income protection.
There is the PPI version of income protection which is pretty useless much of the time.
Then there is the PHI version of income protection which is much better but the policies can be pretty much placed into budget, standard and comprehensive levels.  Those are not official classifications but you can effectively split them that way.  Budget end ones are nearly as useless as PPI.   Standard and comprehensive levels are much more likely to be suitable.

I don't suppose you have time to expand on why you believe some of these are useless? And also what PHI means 😀

MyRealNameToo

Burnsie1983 said:

dunstonh said:

Life insurance is cheap as chips, but add in >£60+ CI, then goes up quickely.

It would do.  You are more likely to claim on CIC than life assurance.

But then there is "income protection insurance"...which I can get for cheaper...but it looks like the only diference is it's not a lump sum! 

Depends on what you mean by income protection.
There is the PPI version of income protection which is pretty useless much of the time.
Then there is the PHI version of income protection which is much better but the policies can be pretty much placed into budget, standard and comprehensive levels.  Those are not official classifications but you can effectively split them that way.  Budget end ones are nearly as useless as PPI.   Standard and comprehensive levels are much more likely to be suitable.

I don't suppose you have time to expand on why you believe some of these are useless? And also what PHI means 😀

PPI (or Accident and Sickness as I would call it), isnt underwritten at the time of purchase so you dont know what is and isnt covered. It's an annual policy so prices can change wildly each year and insurers can cancel the policy at any time. Most PPI sellers cancelled policies during covid or increased premiums at least 4x what people were paying the year before. Finally it normally only pays out for 1-2 years maximum whereas the average claim on PHI is something like 7 years. 

PHI (Permanent Health Insurance) is the full fat version, it's underwritten at point of purchase and you can fix the premiums until your 68th birthday (or whatever your planned retirement age is). The insurer can only cancel for fraud or non-payment and can't spike the premiums if you fixed them due to pandemic. The fullest version pays out until your 68th birthday so if you are ill tomorrow and can never work again they will pay you for 26 years. There is a cost saving version though where the maximum duration of payout is capped 

kingstreet

You can choose "own occupation" definition on PHI which means a claim will be paid if you're unable to follow the usual requirements of your own occupation. Cheaper versions can often be based on "any occupation", or "work tasks" which make claiming more difficult.

EG on work tasks being able to hold a pen; or operate a keyboard may see a claim declined.

poseidon1

Worth pointing out that some employers offer group  PHI coverage to employees as a benefit in kind. All my past Accountancy, Legal and financial services employers did so.

I would certainly explore PHI with an employer 1st and foremost,  before looking at a personally funded contract.

MyRealNameToo

poseidon1 said:

I would certainly explore PHI with an employer 1st and foremost,  before looking at a personally funded contract.

The problems with group income protection is firstly, what happens if you switch employer and your new one doesnt offer such favourable terms? GIP is often paid via payroll so subject to tax. You can still be fired, made redundant etc mid claim and therefore benefits stop and no opportunity to replace it with something else at that point. GIP is much more likely to offer a lump sum to end the claim and each offer I've seen is vastly less than the net present value of future claims. 

Top tier PHI gives you the ultimate comfort that no matter what happens to your health you will be getting paid until your retirement age. GIP doesnt come close to that. Obviously personal circumstances will determine if the protection is worth the cost or not. 

poseidon1

MyRealNameToo said:

poseidon1 said:

I would certainly explore PHI with an employer 1st and foremost,  before looking at a personally funded contract.

The problems with group income protection is firstly, what happens if you switch employer and your new one doesnt offer such favourable terms? GIP is often paid via payroll so subject to tax. You can still be fired, made redundant etc mid claim and therefore benefits stop and no opportunity to replace it with something else at that point. GIP is much more likely to offer a lump sum to end the claim and each offer I've seen is vastly less than the net present value of future claims. 

Top tier PHI gives you the ultimate comfort that no matter what happens to your health you will be getting paid until your retirement age. GIP doesnt come close to that. Obviously personal circumstances will determine if the protection is worth the cost or not. 

Can only recount my specific experience, but with every one of my professional practice employers (3 accountancy firms, 1 law firm ) together with 3 financial services companies I had group PHI access, so apart from a couple of years of unemployment I had employer sponsored PHI my entire working life.

That said,  never ( thankfully)  had to make a PHI claim so  can't comment on the claims experience issues you mention. I was merely grateful that this safety net together with employer PMI ( private medical insurance which I did use extensively), was in place.