There is no ‘one size fits all’ figure for the amount of critical illness insurance you may need. Your personal finances are unique and to make sure the payout covers your costs, you’ll need to think about your outgoings and expenses.
Many people want to have enough to pay off some or all of their mortgage, or to cover childcare or education costs for their children.
An example of this may look something like this:
Julie (51) and Paul (54) have a joint income of £55,000 a year, they have two children (17 and 15) and an outstanding mortgage of £180,000 which they expect to pay off in 15 years. Their monthly outgoings are £1,500.
Julie’s company offers a long term sickness policy that will pay her full salary for six months, equating to just over £12,000, or around £2,000 a month.
Paul’s work will provide Statutory Sick Pay, giving him £96.35 per week for 8 weeks, which adds up to just under £2,700.
When Julie and Paul bought their home, they took out payment protection insurance, which will cover their mortgage costs for 12 months if either of them is not able to work due to sickness or unemployment.
Julie and Paul decide that they will need £18,000 of critical illness cover to pay for some of the mortgage and a further £32,000 to cover other costs such as their regular outgoings, and possible home alterations. They would like to have this as additional protection during the lifetime of their mortgage, so they take out a policy for £50,000 over a 15 year term.
If you’re trying to work out roughly how much cover you might need, here are some of the things you’ll need to consider:
Rent or mortgage payments – one of the major reasons people take out critical illness cover is to ensure they will be able to pay their mortgage in the event of serious illness. Calculate how much you have left to pay on your mortgage, or add up your rent for a period timeBills – calculate the costs of your household bills, such as gas, electric, council tax, water, home insurance, mobile phone and so onDebts or Loans – add up the cost of any outstanding debts or loans that you are in the process of paying offFinancial dependants – if you have children or other dependants, calculate how you will ensure they are provided for.Medical expenses – you may find yourself in a situation where you need to make changes to your home following your illness, it may be worth considering these costsIt’s also worth thinking about inflation, or the rising cost of living, to ensure your estimates will still cover your costs in the future when prices are higher.
Once you have added this all up, you will have a rough estimate of how much you would need the insurance to cover over a portion of time. It’s worth bearing in mind that if you are lucky enough to be able to cover a portion of these costs (for example through savings, or support from a partner), or if your employer provides generous sickness benefits, you may need a smaller amount of cover, which can help bring the cost of your premiums down.