Peace of mind when your body is falling apart

The statistics are scary. One in four men and one in five women will contract a critical illness before they reach the age of 65. One in three Britons will be diagnosed as having cancer at some point in their life. These conditions don't always prove fatal and survivors can often face serious disabilities for the rest of their lives.

Bad enough to have to cope with a serious illness. But have you thought about how your family finances would be affected? If you can't work, how will you pay the mortgage, for example? And if your condition is fatal, how will your dependants survive?

Enter critical illness insurance (CII), sometimes known as dread disease cover. CII pays out a pre-specified cash lump sum if you are diagnosed as having a condition covered by your policy. What you do with the money is up to you - it's yours whether you live or die, even if you can continue to work.

That flexibility is important. Paying off the mortgage is often the first priority for CII claimants. But you might need the money to pay children's school fees, for example. If you're permanently disabled, the lump sum can pay for alterations to your home, nursing costs, or you could use it to pay medical bills. Terminally ill claimants sometimes use their money for a trip abroad.

Generally, a CII policy will cover you if you suffer a heart attack, stroke, most cancers, kidney failure or if you need a major organ transplant. Apart from these, there are wide variations. Some polices are more extensive than others, covering more than 25 conditions including multiple sclerosis, Aids, severe arthritis and Alzheimer's disease.

Of course, most people - particularly younger people - never dream these conditions will strike. But, says Roddy Kohn of independent financial adviser (IFA) Kohn Cougar, "I think CII is imperative". He explains: "We recently had a client with testicular cancer who had to claim pounds 100,000 on his policy having been paying a pounds 26 premium for just eight months."

However, with more than 60 insurers and some 230 CII products - each covering various conditions at different prices - finding the right policy can be daunting. Getting help makes sense. John Joseph, an adviser who specialises in CII, says: "The range of illnesses covered is crucial - an IFA can guide you through all the policies available."

The first stage in finding a good CII policy is deciding which conditions you need cover for. Don't presume the big names offer the best deals. "The biggest seller of CII has, in my opinion, got the crappiest policy," says Mr Joseph - he thinks Midland Bank's CII covers too few conditions.

Most people will want a policy that covers heart attacks and cancer, the two most common serious conditions in the UK. These are always covered. In addition there may be particular conditions you want specified - if you have a family history of a certain illness, for example. Where insurers say they will pay out for terminal conditions, or illnesses causing total and permanent disability, ask about your specific concerns.

Insurers structure CII policies either so as to provide cover for a certain period, or on a lifelong basis. If you're most worried about contracting a serious illness while you still have big financial responsibilities, the former may be best. Many people buy CII policies in conjunction with a mortgage where the premiums and the cash sum insured continue until you've repaid the loan, when the cover ends.

Similarly, you might want to pay out for CII only until your children are no longer dependent on you. In which case you'd pay the same level of premium each year until the cover is no longer needed. Other people prefer to be covered until their deaths. But do beware, CII premiums are higher for older people.

In theory price should be the last factor you should consider, once you've found the cover you need. In practice, says Roddy Kohn: "While we try to persuade clients to buy on the range of conditions, we have to do that in the context of premiums."

However, don't be put off altogether. Buy as much cover as you can afford because some insurance is better than none. In fact, CII doesn't have to cost the earth. A 30-year-old male non-smoker, for instance, would pay pounds 23 a month for pounds 100,000 of lifetime critical illness cover from Bupa, while a 40-year-old would pay pounds 45 a month for the same insurance. The rates for women are lower, particularly later in life.

Also consider combining CII with life insurance. While buying the two together is often cheaper than buying separate policies, take care with this approach. With most CII policies that include death cover, no one will be able to claim on your death if you've already claimed on the critical illness portion of the policy.

The writer is features editor at `Investors Chronicle'.

CRITICAL ILLNESS - THE FACTS AT A GLANCE

One in four men and one in five women will contract a critical illness (most commonly a cancer, a stroke or heart attack) before they reach the age of 65. Up to half of those diagnosed will survive five years.

Critical illness insurance aims to pay a lump sum to people affected, which they can use for any purpose, including paying off a mortgage or going on a world cruise.

With more than 60 insurers and 230 separate policies, however, covering a wide range of illnesses beyond the core "dread diseases", it is important to select the right product.

It can make sense to buy critical illness insurance together with separate life cover. These are known as "accelerated" policies, which pay out on death or diagnosis of an illness, whichever comes first. Again, take care: your dependents will receive nothing after your death if the policy has already paid out on diagnosis