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Life and Critical Illness Cover - A Comparison

By David H Thomson

There are a number of different forms of life insurance, whilst critical illness insurance also has a number of variations depending on the particular policy or insurer chosen. Nevertheless, there are sufficient broad principles involved for it to be helpful briefly to compare the principles involved in life and critical illness cover.

Life insurance

As the title suggests, life cover is essentially an insurance on the policy holder's life. It typically involves an assessment of the risk of the policy holder dying within a given period (usually defined as the insurance term) and, in the event of that possibility, paying out a predetermined, guaranteed sum to the beneficiaries named by the policy holder. Such term life insurance therefore typically offers a way of providing for any dependents in the event of the policy holder's untimely death and is often used to ensure that a mortgage or other debts are cleared, so that surviving family members are relieved of the burden of repayments.

The typical term life insurance policy, therefore, involves the following:

  • Deciding the amount of cover required (in other words, the payout made in the event of the policy holder's death). If a mortgage is to be covered, for example, the amount insured might be the amount outstanding at the time of the policy holder's death. If it is a repayment mortgage, that balance reduces over time and, so, a particular form of life insurance, called reducing term life insurance is available to cover the reducing balance as the years progress;
  • The amount of cover purchased is directly proportional to the amount of monthly premiums that need to be paid;
  • Since life insurance is based on the principle of life expectancy, the younger the prospective policy holder, the cheaper the premiums are likely to be;
  • Premiums are payable throughout the insured term and if the policy holder survives that term, then no payout is made.

Life insurance is also sometimes used to describe a product more correctly termed life assurance or whole of life insurance. This guarantees a payout whenever the death of the policy holder occurs. Because of the certainty of the insurer having to pay out at some time, therefore, whole of life insurance premiums are invariably more expensive than those for both life and critical illness cover.

Critical illness insurance

In the comparison of life and critical illness cover, perhaps the most notable difference is that it is the policy holder who receives any benefit to be paid out by the insurer. Just as the title suggests, of course, the insured risk is of the policy holder being diagnosed with a critical illness during the term of the cover purchased. The lump sum payment might be used to provide an alternative income if it is no longer possible to work or for the purchase of medical care or alterations to the home to accommodate a critically ill person.

The typical critical illness insurance policy, therefore, involves the following:

  • Deciding on the amount of lump sum benefit likely to be needed or desired in the event of such a diagnosis;
  • Once again, that level of insured benefit determines the amount to be paid in monthly premiums;
  • Understanding which critical illnesses are covered, since these are likely to differ from insurer to insurer;
  • No benefit is payable if the policy holder completes the insured term without a diagnosis of any of the defined critical illnesses.

Both life and critical illness cover, therefore, represent cost-effective ways of safeguarding you and your family's financial circumstances in the event of the unexpected.

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