Critical Illness Cover: A Safety Net For Your Mortgage

A serious illness can turn your life upside down and make it nearly impossible to keep up with mortgage payments.

Critical illness cover helps by providing a lump sum payout to help you protect your home and your family’s financial security.

Whether you’re a first-time buyer, existing homeowner, supporting dependents, or working with tight savings, our quick guide explains how critical illness cover works, what it covers, and if you might need it.

What is Critical Illness Cover?

Designed to support quality of life, critical illness cover is an insurance policy that pays out a lump sum if you are diagnosed with a serious illness covered by the policy. A Health Foundation report reveals that 1 in 5 adults in England will be living with a major illness by 2040, emphasising the importance of this type of insurance.

When you’re seriously ill, you might not be able to work for months, years or even ever again. This means less money coming in to pay your monthly mortgage payments. The insurance can help you keep your home loan up to date, pay off a lump sum or provide essential security and peace of mind.

The payout doesn’t have to go toward your mortgage. Policyholders usually have the flexibility to choose how to spend the cash lump sum. It is often also used to contribute towards:

• Medical treatments
• Necessary home modifications
• Childcare costs
• Other living expenses
• Bills and debts

What Illnesses are Typically Covered?

Critical illness insurance covers a wide range of serious health conditions (many policies list over 40). Commonly included ailments are:

• Heart attack
• Stroke
• Cancer
• Kidney failure
• Major organ transplant
• Multiple sclerosis
• Major head injury
• Liver disease
• Loss of sight or hearing
• Permanent disabilities due to injury

Note that the exact illnesses covered and their definitions vary between different insurance providers. Always read through your policy carefully to see what’s included.

How Does Critical Illness Cover Work?

To understand how this insurance works, let’s look at its core features and provisions:

• Cash lump sum payout: If you’re diagnosed with a covered serious illness, the policy pays out a one-time cash amount.
• Mortgage protection: The payout can help cover monthly repayments or reduce your mortgage balance. It can also be used to meet other expenses.
• Combined coverage: This cover is often purchased as an addition to Life Insurance, offering protection for both illness and death (sometimes the coverage is combined).
• Policy duration: You can decide how long you want the cover to last. Usually you would tie this to cover the term of your mortgage, so you’re covered for as long as you’re paying off your home.
• Cover amount: How much cover you take depends on your needs and budget. You can decide how much cover you want and usually you would tie this to cover your mortgage balance.

Is Critical Illness Cover Worth it for Mortgage Holders?

To work out if critical illness cover makes sense for you, think about the benefits compared to the potential downsides.

Benefits of Critical Illness Cover:

• Peace of mind: Critical illness cover provides a vital financial safety net. It reduces financial stress and worry about keeping a roof over your head if you become seriously ill.
• Protection during recovery: Your critical illness claim lets you focus on health and recovery without the immediate pressure of mortgage payments. The funds give you breathing space to adapt and plan for the future.
• Keeping your home secure: Critical illness cover allows you to pay off a significant portion or even your entire outstanding loan, depending on the amount of cover you have selected, safeguarding your family’s home during a difficult time.

Risks of Critical Illness Cover:

• Cost: A critical illness policy requires regular premium payments, adding to your monthly expenses.
• Exclusions: Policies always have exclusions, meaning certain conditions or circumstances might not be covered. It’s crucial to understand these limitations before taking out an insurance.
• Potential Overlap: There might be some overlap with other forms of insurance you hold and other benefits avaiable to you. It’s worth considering how critical illness cover fits into your overall financial plan, including options such as Income Protection.
• No cash in value: If you do not claim on your policy during the term covered, there is no cash in value at the end and you cannot claim back your premiums if you cancel the policy during the term.

Income Protection vs Critical Illness? What’s the difference?

Critical illness cover is sometimes confused with income protection. Although both can protect homeowners in trying times, they are different products:

• Income Protection is insurance designed to replace a portion of your monthly income if you can’t work due to illness or injury.
• Critical Illness Cover provides a one-off lump sum payment upon diagnosis of a specified serious illness.

Do You Need Critical Illness Cover for Your Mortgage?

The decision to take out a critical illness cover policy for your mortgage depends on your personal circumstances.

This insurance certainly makes sense in the following scenarios:

• You have no other safety net (e.g. savings or workplace benefits)
• Dependents rely on your income
• You’re in a single-income household
• You are self-employed

It’s less necessary in these circumstances, although may still be wanted as a safety net:

• You have healthy savings
• Your mortgage term is quite short
• You have coverage through your employer or an income protection plan

Speak to a Protection Advisor About Critical Illness Cover

Critical illness cover is one of several insurance options for protecting your home against unfortunate life events. Since policies and coverage vary greatly, it’s always wise to get personalised advice from a qualified advisor.

A professional will help you understand the differences in policy terms, costs, and coverage, and give you a tailored quote that suits your individual needs.

If you’re ready to explore your options, Flagstone’s team of insurance advisors is here for a no-obligation chat. Contact us to discover how critical illness cover and other mortgage protection options can keep your home and family secure.

FAQs

Is critical illness cover the same as a life insurance policy?

No. Life insurance pays out if you die, whereas critical illness insurance claims pay out if you are diagnosed with a major illness listed in the policy.

What does critical illness cover cost?

Premiums for this  cover vary based on age, health history, lifestyle, cover amount and policy duration. Generally, the younger and healthier you are, the lower your monthly costs.

Can critical illness insurance cover work-related accidents?

In some cases, critical illness insurance may cover certain serious illnesses or injuries resulting from a work accident, such as third-degree burns, blindness, traumatic head injury, or a coma. However, it is not meant as workplace accident or indemnity insurance, so cover may be limited.