Watchdog wary over Critical Illness Insurance.

You have taken out a critical illness insurance policy so that if you ever are in the unfortunate situation of developing a life threatening condition, you will be compensated.

But what if you wind up with a critical illness that is not guarded against on the insurance policy? What many people do not realise, and what can be of real concern, is that you may find that after you have purchased critical illness insurance you are only covered for up to 35 listed medical conditions. And this is the deal with most insurance policies. So if you develop a life threatening illness not named in your policy you could be faced with the disastrous situation where you get no pay out from your insurance company at all.

On the other hand, it could be that you have an easily treatable sickness and because it is ranked with what the insurance industry calls a “lower grading”, you end up getting a full payout. The Financial Services Authority and the Association of British Insurers are wary about whether insurance companies actually make these differences clear.

Jonathan French, a spokesman at the Association of British Insurers, says it is important that customers have an insurance policy fully explained to them before it gets purchased. “The situation we would not want to see occurring is for them to be buying a product thinking that it does something it doesn’t do.”

And for this reason, the ABI recently updated its codes of best practice for critical illness insurance. French says until recently, 35 conditions was the maximum number any company covered for critical illness insurance. “What we set out are essentially the minimum standards companies have to apply to their policy. The guidance we have published improves the way the critical illnesses are defined. It makes it clear to consumers what levels of illness are covered and what aren’t.”

The cost of critical insurance varies. For someone in their late 30s for a 35-year term with a payout of £500,000, premiums cost anything up to £600. Scottish Equitable charges premiums of £290 and Scottish Provident charges £409 premiums for policies based on these conditions. Both these policies are reviewable. A guaranteed policy with Scottish Provident is £560.

So these figures give you an idea that the amount of money you pay out for this type of insurance can be expensive. You can imagine how infuriating it could be to find that you have paid out on the policy only to learn that when you do become critically ill your insurer will not pay you out. There is now, however, a new critical illness product on the market. Prudential is marketing a new ‘Flexible Protection Plan’, which covers up to 140 medical conditions.

In the ‘Flexible Protection Plan’ there are partial payouts depending on the severity of the condition. If the condition worsens, there is more paid out to the maximum sum which has been insured. Most other policies do not offer partial payouts.

Take loss of eye-sight for an example. It would normally be the case with a critical illness policy that you would only receive a pay out if you became completely blind. But the Prudential policy will pay out 25% if you loose sight in just one eye.

But here is the catch. The cost of the policy is almost twice that of conventional illness cover and spectators worry that there will be some confusion about how the severity of an illness would be defined.