Is critical illness cover worth it?

On average, a policy will set you back £30 a month

Critical illness cover is one of the fastest growing sectors of the insurance industry, but with the prices of new policies soaring, is it worth taking out?

By Penny Haslam BBC Radio 4's Money Box

There are five million people in the UK who have a critical illness insurance policy, which will pay out a lump sum if they become seriously ill.

But the cost of buying one of these policies has doubled in the last year and claims have been restricted.

This type of insurance has increased in popularity over the years, as people realise they are more likely to live longer and get ill, than they are to die young.

In fact, over a million new critical illness policies were sold last year alone, making it one of the fastest growing sectors of the insurance industry.

Who is it for?

It is popular with homeowners and the self employed, and is often sold with other types of life insurance.

Philippa Gee at financial advisors Torquil Clarke, says they can be a good buy for some people.

"It is really for people who do not have enough money saved away, have dependents, or if you are the main breadwinner. And this applies to single people too".

On average, a policy like this will set you back £30 a month.

And if you get one of seven critical illnesses, like heart disease, or cancer, it could give you a £100,000 lump sum, to pay off your mortgage for example.

However, the prices of new policies are soaring. In the last 12 months, the cost of buying this type of insurance has doubled.

Excluded illnesses

One of the biggest providers of critical illness insurance is the Prudential, who in April increased its prices for new customers by up to 70%.

If they cannot provide the rate that was advertised, then they should not have offered it

Kevin Carr

And instead of guaranteeing premiums for the life of the policy, they will be reviewing them every five years.

It has also excluded certain cancers from its list of illnesses.

Other insurance companies like Norwich Union and Scottish Equitable have taken similar steps, but Kevin Carr at brokers Lifesearch is particularly angry about the Prudential's moves.

He told the programme: "What was unprecedented about the Pru's decision was that they applied the changes retrospectively to 50,000 applicants that had already applied for their insurance."

And Kevin believes that "If they cannot provide the rate that was advertised, then they should not have offered it."

Resignations

So the 50,000 new customers waiting in the Pru's administrative pipeline will have to pay more to be covered for serious illnesses or go elsewhere.

Prudential's Chief Executive Mark Wood denies reneging on the deal. He told the programme:

"Sadly we were not able to meet the demand and effectively sold out of what was a very keenly priced product."

He also told Money Box that three members of his senior management team resigned on Thursday over this issue, highlighting real concern that customers have not been fairly treated.

And IFAs and insurance brokers are still furious over the Prudential's actions.

Alternative policies

One independent financial advisor, Diane Brown at Compton House Financial Management, says she has never sold a critical illness policy as there are cheaper alternatives around, such as permanent health insurance.

We are all afraid of getting cancer, or having a heart attack. But you are much more likely to get a disabling illness that will not allow you to work

Financial Manager Diane Brown

Diane is also very concerned that attractive rates of commission has led to a boom in sales in the last year.

"It is a fact that the commission on permanent health insurance is about a tenth that on critical illness, particularly when one gets older, so whether this is a factor that is changing the market place, one does wonder".

It is also a product that is very easily sold, as Diane says: "We are all afraid of getting cancer, or having a heart attack.

"But the odds are that you are much more likely to get a disabling illness that will not allow you to work."

And her final word of warning about this type of policy is that making a successful claim, can be very difficult.

"I have seen some policies where you can not just have one heart bypass you have got to have two, you cannot just lose one limb you have got to lose two.

"You really must know what you are buying if you are contemplating buying one of these fairly expensive products."

BBC Radio 4's Money Box was broadcast on Saturday, 10 May, 2003 at 1204 BST.