The more progressive contracts now also pay out on conditions which could terminate or spoil a career such as the loss of voice for barristers and teachers and the like, as well as being transferable to ‘long term care’ if benefits have not been claimed by the age of 65.   Premiums can be fixed or reviewed and the contract can be written for a ‘term’, which will offer you cover for a set period, and if you happen to fall ill within that time it will pay out, or on a ‘whole of life’ basis – literally what it says, you will be covered for the whole of your life.

Critical illness insurance pays out a lump sum on the diagnosis of a range of serious illnesses. Provided the patient survives a minimum period after diagnosis, typically 21 or 28 days, the cash is paid regardless of whether they make a full recovery. The number of conditions covered varies from insurer to insurer but they will include a heart attack, stroke and most forms of cancer. Each policy will specify exactly the range of illnesses that it covers.

Advances in medical know-how are making it possible for people to survive and even enjoy life during and after suffering a serious health setback. However, if you survive, but are not well enough to work, you will still have the mortgage and bills to pay. In fact it's likely that your living costs will increase if you need some sort of nursing care or have to adapt your home accordingly. Therefore critical illness insurance is designed to cover both loss of earnings and a potential increase in living expenses.

Critical illness cover first appeared in the UK in the late 1980s. The concept originated in South Africa, developed by the brother of the famous heart surgeon Dr Christian Barnard. Although initially offered as an "add-on" to term, whole of life and endowment policies, it is now also available as stand-alone insurance cover.

There are broadly two types of critical illness policy: whole of life and term cover. As their names suggest whole of life lasts as long as you live, whereas term is for a fixed period; usually 10 or 25 years.

When buying a policy, you have to choose between guaranteed and reviewable rates. Guaranteed critical illness polices are so called because they charge the same premiums for the whole of the policy. A reviewable policy on the other hand has rates that may be altered by the insurer. A typical reviewable policy will have premiums fixed for the first five years, and then reviewed at regular intervals afterwards, whether every five years or even every year.

The policy holder's advancing age and likelihood of developing serious disease are factored in from the outset so there is no age banding once the policy starts - unlike private medical insurance.

If you already have a life assurance policy, you may think critical illness cover is a waste of time but it offers very different protection. Your life assurance policy will only pay out if you die, whereas critical illness insurance will pay up as soon as you are diagnosed with a life-threatening illness.

What critical illnesses are covered?

Different policies will cover a different number of critical illnesses. Each policy will only cover the conditions set out in the product literature that your financial adviser or insurance company gives you, and no others. According to the Association of British Insurers (ABI) for a policy to be called "Critical Illness" it must cover three core conditions. These are a heart attack, cancer and stroke. In addition, since April 2006, the ABI has carried a list of 23 model conditions which form its Statement of Best Practice (SoBP). In order to be competitive - although not by law - insurers will have to cover all 23 conditions although some providers, such as Bupa, offer a lot more.

The ABI also sets down conditions that will typically be excluded from critical illness policies. These include drug abuse, AIDS and even contracting a terminal illness when living abroad. Some types of cancer may also not be covered. The full definition under each heading in your policy document shows what your policy covers. It's crucial to read these carefully as finding out you are not covered on claiming can only make a devastating situation worse. Being totally honest on your application is also crucial - insurers hire entire departments whose job it is to investigate the validity of claims. If you don't understand anything or require more information, ask your insurer.

Bear in mind that just contracting a form of the stated illness may not be enough to claim. Gruesome as it seems, the ABI also sets down model definitions for the 23 conditions of exactly what constitutes each one. For example, cancer will have to be in a certain stage of advancement and - even more sickening - third degree burns will have to cover 20% of your body.

What affects the cost of my policies?

The cost of cover will be driven by a variety of factors including your age, sex and occupation. Premiums will be sharply higher if you smoke. Some jobs that you might not consider risky can affect the cost. For example, teachers, chefs and investment bankers may pay more for critical illness cover because of the effect of stress.

As with all types of insurance, life assurance policyholders pay premiums into a common fund from which all claims are paid out. In order for the insurer to be certain there will be sufficient funds to pay out all the claims, there has to be a relationship between the premium charged and the benefit given under a policy. This is easier to predict with life assurance and critical illness insurance than with other types of insurance, because mortality and illness tables can be used to predict the number of deaths and illnesses and, therefore, the number of likely claims.

However, the tables don't always tell the whole story. In the late-1980s life assurance costs rose sharply with companies worrying about the potential impact of AIDS. When it became clear that there was not going to a mass impact on UK death rates from AIDS, premium costs started to come back down again.

Equally, advances in medical care have been responsible for soaring critical illness premiums since the mid-1990s. Costs have risen because insurers have had to meet an increasing number of claims, which have come about by the earlier diagnosis of a critical illness due to medical advances.

Source: Moneyextra and The Onion Group