Are Critical Illness policies worth it? Well, it is always worth considering how we could manage if illness unexpectedly came along. Alternatively, are these policies an insurance industry con, to frighten us into insuring ourselves against every possible scenario and having no money left for anything else?
First of all, what exactly are Critical Illness policies?
Put simply, they are designed to provide financial support in the event of a serious illness or injury should come along. They are particularly helpful if someone can no longer work and the insurance payout, in the form of a lump sum, can be used to replace that income. In some circumstances, the money could be used for additional care or adaptations to a house. At the very least, Critical Illness policies can provide reassurance for dependent family members.
As with all insurance policies, there is a balance between the likelihood of something happening and if it does happen, what will it cost. In other words, what is the chance of a 40 year old man getting a terminal disease and if so, what kind of income does he need to replace if he cannot continue in his work? Or what is the probability of a 50 year old woman being involved in a car accident and losing a limb? What do these liabilities cost? These are all eventualities which nobody can ever foresee or expect, and yet we know they can sadly happen.
Well we know the benefit system is there, at least if you live in the UK or other countries with a state welfare system. And yet if the UK is anything to go by, this is fraught with difficulties but it is still a safety net so you don’t starve. But is the state welfare payout sufficient? Probably not, or it might be means tested so it only pays once you are almost destitute.
And ourselves?
Rachel and I took out Critical Illness policies for each of us, back in 1996, when we got married. We also had a mortgage to buy our house at the time.
In the event of either of us becoming seriously ill, we would have had enough money to pay the mortgage and have a tidy sum left over. It seemed important back then, when we took out [what seemed] an eye-watering mortgage and soon we had children arrive. Within a few years we had school fees to pay alongside all the usual costs of keeping a family fed, watered and entertained. This lifestyle needed some protection.
We paid off our mortgage as quickly as we could, from memory it was paid after eight years, rather than the 25 year term. We did consider cancelling our Critical Illness policies at the time but instead reduced the amount of cover and saved some money on the monthly premium – this was a ‘middle ground’ approach.
Needless to say, the costs have crept up in line with our age and, it has to be said, the likelihood of being afflicted with a critical illness. To counteract the rising costs, we have occasionally reduced the cover so for example, mine would now payout considerably less than the original sum insured.
The other consideration is when you look at the list of illnesses covered. It is quite a long list and these don’t look so distant these days. Surely the chance of having a cancer, or a stroke or even kidney failure will inevitably be coming closer for both of us?
Balanced against this is our early retirement and reduced income. We have to be especially careful with our money these days, we need to review such expenditure on a regular basis but so far, so good.
The monthly invoice for good health?
The reality is that we have budgeted for continuing to pay for the critical illness cover. As I see each monthly payment go out, I think of it as being the monthly invoice for continued good health. So that’s good.
The agonising thing is that the costs will continue to rise and one day it will no longer be cost effective. How do we judge that? What is the criteria? Where do we draw the line?
It is almost unmentionable to say the worst scenario would be to cancel the policy today and then get a critical diagnosis tomorrow. That would be awful and yet the reality is we are creeping ever closer to that horrible gamble.
Thankfully we are not superstitious!
So for now we are keeping the policies running for the foreseeable future….
Interesting. As a self employed person, I always felt critical illness cover to be imperative and, fortunately and perhaps surprisingly, my policy didn’t have increasing premiums, although the cover stopped at 65 regardless. However, I made a decision to cancel it when I retired, although I really struggled with doing the same for a life (term assurance) policy and have only just fought the demons of superstition to do so. Clearly there was no logic at all in my approach!
Sounds like you did well on that policy and I’m pleased you never needed to claim on it! To be honest, I can remember shopping around, we followed the advice we were given at the time and bought a specific policy. I don’t think we ever intended to keep it rolling for such a long time and it’s starting to feel a bit we are playing Russian roulette if we cancel.