Critical Illness Insurance

Critical illness insurance or critical illness cover is an insurance product, where the insurer is contracted to typically make a lump sum cash payment if the policyholder is diagnosed with one of the critical illnesses listed in the insurance policy. The policy may also be structured to pay out regular income and the payout may also be on the policyholder undergoing a surgical procedure, for example, having a heart bypass operation. The policy may require the policyholder to survive a minimum number of days (the survival period) from when the illness was first diagnosed. The survival period used varies from company to company, however, 28 days and 30 days are the most common survival periods used. The contract terms contain specific rules that define when a diagnosis of a critical illness is considered valid. It may state that the diagnosis need be made by a physician who specializes in that illness or condition, or it may name specific tests, e.g. EKG changes of a myocardial infarction, that confirm the diagnosis.

There are alternative forms of critical illness insurance to the lump sum cash payment model. These critical illness insurance policies directly pay health providers for the treatment costs of critical and life-threatening illnesses covered by the policyholder’s insurance policy, including the fee of specialists and procedures at a select group of high-ranking hospitals up to a certain amount per episode of treatment as set out in the policy.

What conditions are typically covered?

The schedule of insured illnesses varies between insurance companies. Examples of other conditions that might be covered include:

• Alzheimer’s disease
• blindness
• deafness
• kidney failure
• A major organ transplant
• multiple sclerosis
• HIV/AIDS contracted by blood transfusion or during an operation
• Parkinson’s disease
• paralysis of limb
• terminal illness

Need for Critical Illness cover

Critical illness cover was originally sold with the intention of providing financial protection to individuals following the diagnosis or treatment of an illness deemed critical. Critical illness may be purchased by individuals in conjunction with a life insurance or term assurance policy at the time of a residential purchase, known as a ‘bolt-on’ benefit.

The finances received could be used to:

• pay for the costs of the care and treatment;
• pay for recuperation aids;
• replace any lost income due to a decreasing ability to earn; or even
• fund for a change in lifestyle.

This insurance can provide financial protection to the policyholder or their dependents on the repayment of a mortgage due to the policyholder contracting a critical illness condition or on the death of the policyholder. In this type of product design, some insurers may choose to structure the product to repay a portion of the outstanding mortgage debt on the contracting of a critical illness, whilst the full outstanding mortgage debt would be repaid on the death of the policyholder. Alternatively, the full sum assured may be paid on diagnosis of the critical illness, but then no further payment is made on death, effectively making the critical illness payment an ‘accelerated death payment’.

Some employers may also take out critical illness insurance for their employees. This contract would be in the form of a group contract and has become an essential strategy used by employers around the world to both protect their employees financially as well as attract more employees to consider working for the company.