We’ve all known someone, maybe a friend or relative, who has fallen critically ill. The consequences can be devastating for them and their family. Support through such challenging times is crucial.

One way to plan for such unforeseen circumstances is by protecting their financial well-being through a critical illness policy, also referred to as a living benefit. Unlike a death cover, any benefits from such a cover are reaped while one is still alive.

The primary goal of a critical illness policy is to provide a financial buffer to you and your family when your family’s lifestyle could be at risk. Should you unexpectedly fall ill and be diagnosed with a critical illness that would be covered under the policy, a lump sum of money, known as the sum assured, would be paid out.

Are all critical illness policies the same?

Critical illness policies come in diverse options. One option would be to combine as an additional benefit (also known as rider or add-on), such as with a term death cover or a long-term savings scheme. Another option would be to take out a critical illness policy as a standalone, meaning that the cover will not be attached to any other type of insurance policy or saving scheme.

These types of policies typically include the diagnosis of a range of critical illnesses or surgical procedures. The policy will list what types of critical illnesses are covered and these may include cancer, heart attack, bypass grafting of a coronary artery, kidney failure, major organ transplant, blindness, stroke and other life-threatening illnesses.

Normally, not all types of diagnosis would be covered under a critical illness policy and such types of policies would be subject to certain exclusions and conditions, hence it is important that before taking out an insurance policy, you read well and understand the related policy terms and conditions.

The primary goal is to provide a financial buffer

The type of benefit payout may also vary depending on the policy, as some type of policies pay out the full sum assured on diagnosis of a covered critical illness, while some types of policies pay out the sum assured linked to the severity level (stages) of the diagnosed covered critical illness. In some situations, critical illness policies also offer additional benefits, such as a guaranteed life assurance or children cover, enabling the life-assured to nominate their children to be covered under the same policy.

How does a critical illness policy differ from a health insurance policy?

The payout of benefits under a critical illness policy would not normally be dependent on the treatment of the critical illness. Insurance companies pay the critical illness benefit for a valid claim and the funds need not necessarily be used for the treatment of the illness. The lump sum can be used in any way you would like to support you or your family during these difficult times. As an example, you can use the payout to clear existing debts such as your home loan or to help with your living expenses while you recover. You can also use the sum assured to cover any other medical or treatment-related expenses that may not be covered by your health insurance or even contribute towards rehabilitation costs.

Many agree that taking out a critical illness policy that provides financial support when circumstances unexpectedly turn upside down is beneficial, but how much will it cost? Is it affordable?

The cost or premium for a critical illness cover is based on several factors, depending on the circumstances of the life-assured, for example, the cover (sum assured) you choose – age, occupation, medical history, whether the life-assured smokes or not, and the duration of the plan. Health and lifestyle factors are also important, including weight and family medical history.

For such reason, the life insurance company will ask you a set of medical or health-related questions when you apply for the policy (known as a proposal or application) and the exact premium is confirmed once the proposal is reviewed or underwritten. The cover will only commence once the company informs you that the proposal has been accepted.

As each person’s circumstances are different, it is important to get a quote for a more accurate idea of the premium. A financial planning adviser can also help you work out the cover you require and provide you with a quotation for the cost of the cover.

Josef Camilleri is head of Products and Distribution at HSBC Life Assurance (Malta) Limited.