Critical illness may be purchased by individuals in conjunction with a life insurance or term assurance policy at the time of a residential purchase. The reason for this is to provide financial protection to the policyholder or their dependants on the repayment of a mortgage due to the policyholder contracting a critical illness condition or on the death of the policyholder. In this type of product design, some insurers may choose to structure the product to repay a portion of the outstanding mortgage debt on the contracting of a critical illness, whilst the full outstanding mortgage debt would be repaid on the death of the policyholder. Alternatively, the full sum assured may be paid on diagnosis of the critical illness, but then no further payment is made on death, effectively making the critical illness payment an 'accelerated death payment'.
The illnesses covered will be specified in the policy along with any exclusions – these differ between insurers. CIC policies usually only pay out once, so are not a replacement for income.
The policy may require the policyholder to survive a minimum number of days (the survival period) from when the illness was first diagnosed. The survival period used varies from company to company, however, 28 days and 30 days are the most common survival periods used.
Critical illness cover was originally sold with the intention of providing financial protection to individuals following the diagnosis or treatment of an illness deemed critical.
pay for the costs of the care and treatment;
pay for recuperation aids;
to pay debts off;
replace any lost income due to a decreasing ability to earn; or even
fund for a change in lifestyle.
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