Don't Make This Mistake With Your Life Cover
Combining life insurance and critical illness cover together could leave you without enough protection.
Buying life insurance and critical illness cover together in one policy might seem like a good idea. After all, not only is it less hassle to set up one plan, but combining policies is normally cheaper too. In this way, you'll have a single policy which will pay out a lump sum if you die, or you suffer an illness covered by the plan during the term you choose.
Do you have enough protection?
I know it's not a very cheery topic, but it's important to understand the risks of under-insuring yourself. After all, wrapping different types of cover up into one neat plan could actually leave you without all the protection you need.
The trouble is when you buy life and critical illness cover together - which is what most people do - you're normally only able to make a claim once.
So once you've made a claim for critical illness, the policy stops. You immediately lose the life cover which was bundled into the same policy.
Worse still, arranging a new life insurance policy at this point could be very costly, since your health has deteriorated. You may find it has become impossible to buy replacement life cover at an affordable premium.
But if you have separate critical illness and life insurance policies, you can make two separate claims.
But are separate policies affordable?
So should you go for a combined policy and hope that a claim for illness doesn't cancel your life cover, or do you pay more for the comprehensive protection provided by two separate policies?
Let's take at look at how much the two options could set you back. The table below shows the cheapest premiums I could find for each. The plans provide £100,000 worth of cover over 25 years for a non-smoking, healthy man, aged 30. The premiums are guaranteed too, so they won't increase every year.
Combined versus separate policies
|Type of cover|
|Total cost over 25 years|
|Life cover & critical illness cover combined||£23.80||£7,140|
|Life cover only||£6.34||£1,902 +|
|Critical illness cover only||£23.90||£7,170 =|
|Total cost of life cover & critical illness cover bought as separate plans||£30.24||£9,072|
|Extra cost of two separate plans||-||£1,932|
Unfortunately, two separate policies could cost an extra £6.44 a month - that tots up to a not insignificant £1,932 more than the cost of a combined policy over 25 years. And you'll see that the cheapest stand alone critical illness policy (£23.90) is actually a tiny bit more expensive than the combined policy (£23.80) even though there's no life cover included.
Looking at it another way
But let's say you take out a combined plan with cover of £250,000. If you had to make a claim for illness you would receive a lump sum of this amount. You might decide to use this money to clear your mortgage now.
So that means, if the worst were to happen later on, you may not need as much life insurance since you no longer have a mortgage to worry about. (But don't forget, you might also need extra cover to clear other debts, pay for care for your children and so on.)
In other words, one pay out of £250,000 may be sufficient to protect you and your family overall regardless of whether the claim is made for illness or death.
Of course, it works the other way too. Two separate plans can be set up to provide double the protection with a lump sum potentially payable on diagnosis of a critical illness, and another lump sum payable on death. You might think that's worth a few extra pounds each month in premiums.
In the example shown above, remember for the total monthly premium of £30.24, you would actually have £200,000 worth of cover - £100,000 under the stand alone critical illness policy and a further £100,000 under the life insurance policy.
But the premium of £23.80 for the combined policy only provides cover of £100,000 overall, which can only be claimed either on illness or death. Not both.
Finding the right plan
If you do decide to pay more for separate plans, finding life cover on its own is pretty easy. But stand alone critical illness plans are a bit more difficult to come by, and not all insurers offer them. Legal & General, for example, will only provide critical illness cover with a life insurance policy. It can't be bought by itself, so you may need to hunt around further to find the cover you need. (A life insurance broker can help you with that.)
And don't forget, whichever route you go down, it's important you understand exactly what cover your policy - or policies - provide. And if you're unsure how much protection you need, speak to a good independent financial adviser first.
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The comments above are the opinions of the author only and do not represent advice specific to your circumstances
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