Do you know how much critical illness cover you might need?
A serious illness can affect more than your health. If you are unable to work or need to make changes to your lifestyle, you may also face higher costs and a reduction in your income.
Our free UK Critical Illness Calculator helps you estimate how much critical illness cover you may need. It can take into account your income, mortgage and other debts, family commitments, savings and existing protection.
This can help you answer an important question: how much critical illness cover might I need if I became seriously ill?
The result is an illustration rather than a recommendation. The right level of cover will depend on your circumstances, financial commitments and the protection you already have.
Why does critical illness cover matter?
Critical illness cover pays a tax-free lump sum if you are diagnosed with one of a defined list of serious conditions - typically cancer, heart attack, stroke, multiple sclerosis and a number of others. Unlike life cover it is paid on diagnosis, while you are still alive, and is intended to replace lost income, fund treatment, and maintain the household during recovery.
The right sum assured usually combines outstanding mortgage, 1-2 years of household income, and a treatment or lifestyle buffer. Most UK protection advisers recommend taking critical illness cover alongside life insurance (often as a combined or “menu” plan) so both events are covered for one administrative fee.
How does critical illness cover work?
Critical illness insurance can pay a lump sum if you are diagnosed with one of the illnesses or medical conditions covered by your policy.
The conditions covered, definitions used and circumstances in which a claim can be made vary between policies. It is therefore important to check the terms of a policy rather than assuming that every serious illness will result in a payout. HMRC describes critical illness policies as insurance that pays a lump sum when the insured person suffers from one of a number of specified diseases.
If a claim is successful, the money can generally be used as you choose. You might use it to replace lost income, pay your mortgage, cover household costs, fund treatment or make adaptations to your home.
How much critical illness cover do I need?
The amount of cover you need will depend on what you would want the money to achieve. You may want enough cover to replace part of your income for a number of years, pay off your mortgage or other debts, and provide additional money for your family’s living costs.
The calculator allows you to consider these different costs together, giving you an estimate of the level of cover that could be required.
There is no single amount of critical illness cover that is suitable for everyone. Someone with a large mortgage and young children may have very different protection needs from someone with no dependants and substantial savings.
Should critical illness cover pay off my mortgage?
Your mortgage may be one of your largest financial commitments. If you became seriously ill and could no longer work, a critical illness payout could potentially be used towards the mortgage or other debts. This could reduce your monthly outgoings at a time when your income may be affected.
Whether you need enough cover to repay the entire mortgage will depend on your circumstances, existing savings and other protection.
How much cover do I need to replace my income?
A serious illness could affect your ability to work, either temporarily or permanently. The calculator allows you to consider how much income your household may need to replace and for how long. You can then compare this with your existing savings, employer benefits and other forms of protection.
Critical illness cover is different from income protection. Critical illness cover normally pays a lump sum following a qualifying diagnosis, whereas income protection is designed to provide an ongoing income if you are unable to work because of illness or injury.
For some people, the two types of cover may form part of the same wider protection plan.
What if I have children or other dependants?
If other people rely on your income, a serious illness could affect the whole household. You may want to allow for your children’s living costs, education and other expenses, particularly if they are young and financially dependent on you.
Your partner’s income and your family’s other resources can also affect the amount of cover you need.
The calculator lets you include these financial commitments so you can build a broader picture of the potential protection gap.
What is the difference between critical illness cover and life insurance?
Life insurance and critical illness cover protect against different events.
Life insurance is generally designed to pay a benefit when the insured person dies. Critical illness cover is designed to pay a lump sum if the insured person is diagnosed with a qualifying illness covered by the policy.
Some policies combine life insurance and critical illness cover, while others provide critical illness cover separately.
The amount of cover and the illnesses included will depend on the policy terms, so it is important to understand exactly what you are buying.
Is a critical illness payout taxable?
A critical illness policy normally pays a lump sum rather than an income. HMRC states that payments from critical illness policies are not taxable as income in the hands of the recipient.
The tax treatment can depend on the particular policy and circumstances, however, so you should check the terms of the policy if you have any concerns about taxation.
Should I speak to a financial adviser about critical illness cover?
A critical illness calculator can help you understand how much cover you may need, but it cannot account for every aspect of your circumstances.
A regulated financial adviser can help you consider how critical illness cover fits alongside your mortgage, income, savings, pensions and wider financial plans. They can also help you compare critical illness cover with other forms of protection, such as life insurance and income protection, and understand how the policy terms could affect you.
Before taking out cover, it can be useful to consider not just the amount of insurance you may need, but also the cost of the policy, the illnesses covered, exclusions, how long you need the cover for and what would happen if your circumstances changed.
If you would like help assessing your options, you can use the Trusted Advisor adviser matching service to find a regulated financial adviser suited to your needs. Alternatively, email our team at hello@trusted-advisor.co.uk and we can help you understand the next steps.