Matthews IFA Ltd
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Critical advice

I once heard about a gravedigger saying that he found nothing disturbing about spending his days in a cemetery. 'You've nothing to fear from the dead,' he said. 'It's the livin' you'd need to keep an eye on'.

These fine words fit well with today's topic about being prepared for extreme situations, such as critical illness (CI). A 'critical' illness is an event where you lose your income but where you, rather stubbornly, refuse to die.

With medical advances, we are now more likely to survive a serious illness than ever before. However, recovery can mean a long time off work, and when you consider that your partner or spouse might also have to stop working to take care of you, then a two-income household can rapidly find it-self living on health benefits.

And will the bank be sympathetic to your plight? If you ring them asking for your mortgage to be put on hold, you are likely to get a two-word answer, which at the polite end of the scale might be something like 'certainly not'.

Meanwhile, the Department of Work and Pensions seems to believe we are ill-prepared for such eventualities. They said recently that a third (32 per cent) of UK households have no savings set aside for an emergency.

This is where 'critical illness insurance' or 'CI' comes in. CI could really be critical, if a serious illness were to strike.

CI pays out a tax-free lump sum or a regular income if you are diagnosed with any of a pre-agreed list of serious illnesses. The core conditions for the original CI policies were cancer, stroke, heart attack, tumour, multiple sclerosis, or the need for certain severe medical procedures. These core maladies are still the source of most claims. One leading CI provider, Aegon, said that last year five illnesses - cancer, heart attack, stroke, multiple sclerosis and benign brain tumour - accounted for 90 per cent of claims, with cancer alone accounting for 62 per cent.

And if that little voice in your head is saying 'it'll never happen to me', bear in mind that in the UK, one in four men and one in five women will suffer a critical illness before retirement.

It can also happen sooner than you think. Legal and General say that 70 per cent of their claimants are under 50 and, in fact, the average age for CI claims is around 45.

In the past, CI policies were slated for having too much 'wriggle-room', allowing insurers off the hook when it came to paying claims. As a result, they found the cover increasingly hard to sell, and so were forced to clean up their act.

First, they started to declare how many claims were successful. Aegon said it paid out 93 per cent of all claims last year, Aviva was also well up in the 90s and industry-wide they say that, on average, more than nine in ten are now met. Policies have also evolved, from the core diseases above to a list now covering an average of 34 diseases.

At the top of the table, however, PruProtect's 'Serious Illness Cover' lists a massive 161 illnesses and conditions, and they have also been among the pioneers of 'severity based' cover, where you get a partial payout for a milder or lower level form of an illness.

This fits well with the medical advances and ever-increasing range of treatable ailments I mentioned earlier, and shows that it now makes more sense than ever to consider CI.

Given that this month is Prostate Cancer Awareness month, this condition illustrates the point (about how cover has evolved) perfectly.

Prostate cancer, in its low grade form, is the most common cancer of all among men, yet until 2007 no CI plan on the market paid out for it. This was because low grade prostate cancer was deemed not severe enough to warrant a payout of a full CI sum assured. Now, PruProtect and every major insurer, under their 'severity-based' policies, offer a partial payment for this condition - varying from 20 per cent to 25 per cent of the total insured amount.

With prostate cancer there is one string attached though - and this highlights why, in buying CI cover, it is so crucial to have an adviser to explain your policy. CI cover often does not pay out on diagnosis of low grade prostate cancer alone, with many policies requiring that some treatment or medication is undertaken before the cheque is posted.

With the prostate, however, given its proximity to the nerves around the bladder and rectum, surgery often results in incontinence. Consequently, advice to doctors, given by the National Institute for Clinical Excellence, recommends an initial period of "active surveillance", rather than surgery or drugs. This can result in a long delay before the treatment begins which would give the green light for a valid CI claim.

The policies themselves can also vary widely, in terms of the useful little add-ons they include, and it's very much still a case of 'the large print giveth, and the small print taketh away'.

In general, a good policy will cover lots of health conditions and include severity-based cover. It will have 'guaranteed insurability options', which allow you to up your cover, without further medical evidence, at key times such as when you get married, have a child, or increase your mortgage. It should provide a 'terminal illness payout' so that you get a lump sum if you are told you have less than a year to live. It should also include a 'buy-back' option so that, following a claim, your cover can be reinstated with a minimal premium.

On the other side of the coin, a good policy should not have many exclusions - some policies deny cover, for instance, if any illness could be related to alcohol.

All of the above is good news and, as a result, there's never been a better time to get sick - but finding the right policy, and having it properly explained, is best done with the help of an independent financial adviser. In fact, that's advice that could be... critical!

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