Protect and survive survey: Sick as a dog, but finances are healthy

One in four life assurance pol- icies now includes critical illness cover yet, just 15 years ago, the concept did not even exist in the UK and many people remain confused about what it does and whether they need it.

Critical illness insurance started in South Africa in the early 1980s, although the idea of insurance that paid out a cash lump sum on diagnosis of cancer had been tried before.

What made this different was that the policy paid out on diagnosis of the so-called "dread diseases" - heart attack, stroke and kidney failure as well as cancer. The person who drew up the medical definitions on those first policies was Dr Marius Barnard, brother of the pioneering heart- transplant surgeon, Christian.

Barnard realised that as a surgeon, he could save the lives of people with serious heart disease, but could do nothing to help them financially. South Africa's medical system was not free and, even after surgery, many patients were unable to return to their normal job and often saw what little wealth they had disappear. Financially, their family would have been better off had they died.

Critical illness insurance is simply life assurance that pays out on diagnosis of one of a number of critical illnesses, although some also pay out on death. As long as your condition meets the medical definition, it does not matter how bad the illness is, although with some policies you have to be still alive two or four weeks after making a claim.

Four out of five claims are for heart attack, stroke or cancer; some insurers pay out on over 30 different conditions (although the wider the cover, the more expensive). Most plans now cover the big three plus multiple sclerosis, by-pass surgery and kidney failure; and, thanks to medical science, more people now survive a critical illness than die.

Critical illness insurance is frequently used to cover a mortgage - the biggest financial commitment for many - as not being able to meet monthly payments while trying to recover from, say, a heart attack or cancer surgery, is many people's worst nightmare. The policy can be added on to many mortgage endowments, or taken out separately - so that if you do suffer a critical illness, you, rather than your mortgage lender, gets the money.

Abbey Life has paid out more critical illness claims than any other insurer and was one of the first into the market in 1986. Life and health marketing manager Lin Hudswell says that most people use the cash to pay off their mortgage or pay for home improvements, although others may choose to change their lifestyle or go on a once-in-a-lifetime holiday.

Most critical illnesses are life threatening and, afterwards, the thought of getting back into the ratrace is the last thing convalescents want.

So three things are important in choosing what cover to have. First decide what sum assured you need: covering the mortgage and other loans is usually the top priority. But John Joseph, an independent financial adviser, warns that just covering the mortgage may not be enough. He advises looking at your other expenses too, and then working out how much money you would need to cover the lot.

For many, the limit will be how much you want to spend, rather than how much cover you might want.

The second consideration is whether you need more life assuranceo. If so, it is possible to buy a policy that pays out on either critical illness or death. Though cheaper than buying each type of cover separately, if you do suffer a critical illness, your life cover goes too.

Last year, Colonial Life introduced the concept of "buyback": after two years, you can buy back part of your life cover. Other insurers are now developing this option.

The last choice is how long you want the protection to last for. Cover should usually last until any children are grown up, or you may want it to last until you retire. Keeping a policy going into retirement can be more expensive and the need is usually lower as by then your pension should be providing your income.

More than 60 insurance companies offer critical illness insurance, and there are over 200 different policies available, so there is no shortage of choice. Any good financial adviser should be able to guide you through the maze.

Finally, John Joseph suggests asking your employer how long they would pay your salary if you were off work ill. Few will pay for more than a few months, so a combination of critical illness to give a lump sum, and income protection insurance to give an income, can help ensure that if the illness does not kill you then the financial consequences won't either.