Compare Critical Illness

Those investing with capital gains from equities as their objective will therefore normally be better off investing in unit trusts than in equity-linked critical illness insurance bonds. The reinvestment benefit helps to produce capital growth over a period of years, which is fine for the investor interested in capital growth, but not for one who wants to draw an income from his investment.

However, bonds can be used for this purpose, too, because the bondholder is allowed to withdraw a proportion of his original investment each year without any current tax liability. Since the Finance Act 1975, the taxation of bonds has become quite complex, but the basic position is as follows. If you invest in a single-premium investment bond, you may withdraw over 20 years a sum equal to the original investment without incurring any current tax liability.

This is equivalent to 5% per annum, which is also the maximum annual income you may draw to begin with. But if you forgo it for a period, then the withdrawal rate may be higher later. For example, if you take no income for the first five years, you may then use up the full allowance in the next 15 years, or over a longer period at a lower rate. The “income” is taken by selling the appropriate number of units back to the company, and whether the amount you take is more or less than the actual income earned by your capital in that period will depend on the yield on the fund’s investments.

For the 5 percent to come solely out of income, the fund would have to be earning 8 percent before tax. So long as the capital value is also growing, however, many investors will be happy to draw off a small proportion of it as income. (Capital and income are not distinguished in the unit price, because all income earned is reinvested within the fund and is therefore reflected in the unit price). With critical illness insurance you could be sure to have the peace of mind.

While the flexibility provided by critical illness insurance policies may be very useful, it does of course have a cost. One element of the cost comes when it is combined with life insurance. For the young man such a combined critical illness insurance plan is related to the premiums he can elect to pay up to the age of 65, and this produces a larger guaranteed benefit than that on a shorter-term dated policy term. For example, the 29-year-old paying £10 a month received £3,120 critical illness cover, whereas on a shorter dated plan the same £10 premium would provide a sum assured of about £1, 800. This extra coverage amount from critical illness insurance must reduce the amount of invest­ment benefit derived from a given premium.

A less easily quantified factor is the restriction the flexibility of maturity dates imposes on an insurance company’s investment management. With dated critical illness insurance policies and illness tables, the company can predict with con­siderable accuracy the volume of claims likely in any year, and this means that it can plan its investments to produce a given amount of income to meet them. If the amount of claims is uncertain, there will be a tendency to “play safe” and allow for a margin of extra income. To achieve this will require a larger proportion of funds being invested in fixed­ interest securities, which on past evidence at least are unlikely to produce as large an investment gain over long periods as the main alternatives, shares and property.

Since, at the time of writing, open-ended critical illness policies have been in existence for less than 10 years, it is too early to say whether there is any evidence that this second factor is having such an effect. The extra cost of the flexible contract can, however, be estimated in terms of the projected benefits quoted on fixed and open-ended policies over the same period; the flexible policy’s proceeds current bonus rates are projected at between 5% and 15% below those of the fixed endowment over 10 years.

In case you are a small business owner and one of your best workers gets caught with a serious illness, it can considerably impact the productivity of your business. Moral breakdowns will occur as stress will start to take the ascendant on you. The fluidity at which your business runs could be impacted due to the loss of precious skills and management. Your business could be driven towards losing important profits. Fortunately, critical illness insurance is around to take care of such issues. But it would still be hard to find another person to replace the sick worker.

If your worker has contracted a severe disease such as cancer or stroke, you will not be aware when or if he will be able to resume duty. The employee can remain out of office for months or even a year. What do you do in such a situation? You can do certain things but at first you need to ponder well over ideas. Will you recruit another person to replace your sick employee? How much time will it take you to get the right person? You should bear in mind that the longer you wait to get the right candidate; the more your business will be impacted. Lost sales and profits have to be considered. Regarding this matter, many companies have yet to have critical illness insurance to remain protected against such eventualities.

Possible explanations could be that companies haven’t yet taken the time to analyse possible problems or they might have found such insurance too expensive. Thankfully, a solution has been found: group critical illness insurance has been introduced. Group critical illness insurance gives the company the choice to cover the employees that it wants. It is the company that will undertake the responsibility of paying premiums and in case of illness; it will receive benefits from the insurance company. The company will be able to make a claim if one or more employees suffer from an illness mentioned in the policy. The critical illness insurance policy may contain coverage for common illness conditions.

Having a critical illness policy means that the policy pays out on the event of suffering from a critical illness of which all are specified in each provider’s key facts or handbook the number of critical illness can change from provider’s.

Typically you can add to choose the following to most critical illness policies such as the Total Permanent Disability, Reinstatement Option and/or Indexation Option.

You can add Total Permanent Disability to any person taking out a critical illness policy. This means that the benefit (cover amount) will be paid to the policyholder if they were unable to carry out their normal daily duties. Total Permanent Disability will have a different meaning from one person to the next as it can be related to their own occupation, suited occupation or typically if they can carry out three of their normal daily activities. Also by adding the Reinstatement Option this means that you would be allowed to take out a new policy only after successfully making a claim from your provider, however you would not then be covered for the full list of critical illness but for example the following conditions would still be typically applied to the new policy: Third Degree Burns, HIV Infection, Aorta Graft Surgery, Major Organ Transplant, Multiple Sclerosis, Kidney Failure, Heart Attack, Stoke, Bacterial Meningitis, Liver Failure, Parkinson’s Disease, Motor Neurone Disease, Cardiomyopathy and Aplastic Anaemia. Finally you could also add the Indexation Option to your policy as this will help to protect your benefit amount chosen. This usually works by the benefit amount increasing in line with the current RPI (Retail Price Index).