What is terminal illness cover?
Whilst life insurance typically pays out to your beneficiaries after you die, most policies now also include a terminal illness element as standard.
Having terminal illness cover can accelerate the pay out process, allowing you to receive funds before you die.
In order for a pay out to be made, the insurer will require a ‘terminal’ diagnosis, from a medical professional in that field.
It is commonly accepted that being diagnosed as having a terminal illness, means the policyholder is expected to die within 12 months. However, if you exceed the 12-month life expectancy you will not be expected to repay the funds.
Although common, it is important to remember that not all policies have terminal illness cover as standard and that exclusions can apply.
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What is the difference between terminal illness and critical illness?
Although often confused, critical illness and terminal illness cover are two different things.
Understanding the differences between these two types of cover is essential to ensure you choose the right life insurance policy.
As mentioned above, a terminal illness pays out a benefit if you are diagnosed with a terminal condition and are predicted to die within 12 months. For example, an advanced form of cancer, (stage 4).
Whereas critical illness pays out if you suffer a life-changing condition, covered by your policy, which is unlikely to result in death (in the near future).
Example conditions include a stroke, blindness, Alzheimer’s disease or Parkinson’s disease. Although unlikely to kill you, these conditions would impact your ability to provide for your family.
Terminal and critical cover in summary:
Terminal illness cover
- Pays out if you are diagnosed with an illness likely to cause death within 12 months
- Diagnosis needs to be made by a medical professional in that specific field
- If you survive past the life expectancy, you will not be expected to pay back funds
- Once a terminal illness claim has been paid, no further claims can be made
- After the claim is paid you stop paying your premiums and the policy ends
- Most life insurance policies include terminal illness cover at no extra charge
- You and your dependents can benefit from the policy pay out before you die
- The pay out could help fund expensive treatment, loss of your earnings, or a carer
- Some insurers will not pay out if your policy has less than 12 months left to run
– However, they will pay out if you die during the policy term - If you have a joint policy generally there will only be a pay out on the first claim
- If you have decreasing term cover, the terminal illness benefit will reduce over time
- If your policy is written in trust but pays out early, it will no longer be in trust and could be subject to inheritance tax
- Sometimes terminal illness is referred to ‘accelerated death benefit’, (especially in the US).
Critical illness cover
- Pays out if you suffer a life-changing illness, which is not likely to result in death
- Common critical illnesses include cancer, stroke, neurological disease and heart attack
- Illnesses/conditions covered can vary from one insurer to another, (please check)
- Can be included as part of a standard life insurance policy or as a separate standalone policy
- Generally, premiums are higher with a critical illness element as the insurer’s risk is increased
- Cancer, heart attack, stroke and multiple sclerosis make up the majority of critical claims, (up to 90%)
- Ensures protection for your dependents if you cannot work/earn
- Could help pay for necessary home alterations, private treatment or a carer
- If you have a joint policy, insurers will only pay out once, (on the first claim).
Remember, if you smoke you are at greater risk to a wide range of critical, sometimes terminal conditions, such as lung cancer, mouth cancer, a stroke, heart attack and coronary heart disease.