Critical Illness Insurance Cover Calculator - how much critical illness cover do you need ?
The purpose of this calculator is to work out a suitable level of critical illness cover for an individual person or a couple.
The motivation for designing this calculator is that while there are many other critical illness calculators available on the web, many give different results based upon the same initial values, and with many it is then difficult to ascertain what formula was used to arrive at the figure given as the recommended sum assured. There are many methods and formulas that are used to calculate the amount of critical illness cover required - while there is nothing inherently wrong with most of these methods, we feel that it could be useful to present a method, then show the breakdown. As you will read shortly, this can be more problematic than working out the sum assured for a life assurance plan (generally you work out the cost of paying off the mortgage, and providing a lump sum for your family), as the very fact of staying alive after a critical illness, rather than dying from it, can bring additional unexpected costs.
Critical Illness cover is the effectively the reverse of life assurance - namely it pays out if you suffer a critical illness and survive, rather than die. For a more detailed overview, see the FAQ about critical illness.
Recently there has been much criticism of critical illness cover - not about the product itself, but more about the inappropriate ways in which it is used or sold, or the way the sum assured is arrived at.
In general, critical illness cover is probably not the most appropriate way to insure your income in the event that you suffered a long-term period of incapacity or ill health and were unable to work. In such an eventuality, Income Protection (PHI) cover is usually a more suitable (and cheaper) way to do this. This calculator does give you the option to take your annual income into account, but this is set to '0' by default. Please bear this in mind if you are considering insuring your income in this way. While nobody is going to stop you doing it, it may not be the most appropriate way.
Therefore, as critical illness plans pay the sum assured in a lump sum amount (as opposed to Income Protection plans that pay out a regular income), the first call upon such a payout is to clear all your liabilities - i.e. your mortgage and other debts. The rationale for this is that while recovering from a serious illness, the last thing you need is money worries and liabilities hanging over you and causing additional problems.
However, there are some other valid use for critical illness payouts - namely to cover the costs of a personal carer if an individual became so incapacitated by an illness that they needed additional help to perform normal activities of daily living (such as washing, dressing, preparing meals, etc). If this scenario was applied to a couple, even the incapacity of a non-working spouse with childcare responsibilities could lead to significant financial and emotional strain.
The cost of providing personal care depends upon many factors - such as the amount of care required (in hours of the day), but more significantly upon the area in which you live. i.e. the cost of employing a carer is always going to be more expensive in London that it is in Newcastle or Edinburgh.
Also, if an individual or couple has children under their care, if either party was incapable of working or looking after the children, it could become necessary to pay for childcare costs in order to continue working - as the alternative could be to leave work and rely on state benefits.
The same point about working out the approximate cost of childcare is similar to point about the costs of employing a personal carer, as it depends on many factors. A full-time nanny or child-carer may cost c. £20,000 per annum, but will be more in areas like London and less in other areas of the country. It also depends on whether such childcare is full-time or part-time, and whether the carer lives-in or lives-out. Obviously if you have family members living near-by who you could rely on to help out, this could reduce significantly the amount of paid help that you would require.
Therefore, for the purpose of this calculator, you need to input:
- Your annual income that you would seek to replace. [Not generally recommended, and set to '0' by default]
- The annual cost of employing a personal carer, or paying for child-care costs.
- Any lump sum required in the event of suffering a critical illness and need to make modifications to your living environment.
- Take possible state benefits (such as Incapacity Benefit) into account [see caveats below].
- Any existing critical illness cover that you have in place.
- Your outstanding mortgage balance
- Other debts that you have (i.e. personal loans, credit cards, etc)
- Liquid Assets that you could realise or sell in the event of an emergency (i.e. deposit accounts, investments, possessions).
- The length of time that you need the cover for.
- If you enter any values for income to be replaced, or personal care / childcare costs, it is assumed that you would take a nominal amount of money, and invest it (either in a deposit account, or other asset-backed investment product) in order to cover these liabilities over a given number of years.
Therefore, there are two options that can be set.
- Rate of Growth of Capital
- Rate of Indexation of Income
The first assumption relates to the required return that you would aim to receive upon investing the money. i.e. if you placed it in a deposit account, you may get an annual return of 3 - 4% per annum. An investment-backed product may (or may not) give a higher annualised return over discrete periods of time. Therefore, if you were aiming for a return of 6% per annum over 15 years, set the value of 'Rate of Growth of Capital' to 6%.
The second assumption relates to increase in costs of employing a personal carer or child-carer over time. While future rates of earnings increases are always unknown, you can use a figure such as the increase in Average Earnings. However, if you wish to calculate this on a more conservative basis, you can always set this figure to a higher percentage.
Therefore, if you wanted to provide for childcare costs estimated at £20,000 per annum over a period of 20 years, expected these costs to rise by 4% per annum, and you wished to play it safe and put capital to cover this away in a deposit account that would pay an average return of 4.5% per annum, the calculator will work out the day-one Capital Amount that you would need to invest.
Modifications to your living environment
Often when people suffer and only partly recover from serious life-threatening illnesses, they find that they often need to make changes to their living environment (i.e. installing a downstairs shower and toilet), or may find it necessary to move to a new property. Such changes or relocations come at a cost, and while you may rent a property, or be eligible for certain grants, it is often the case that you would need to meet all or the majority of any costs yourself.
When calculating these figures, the fact that you could be entitled to state benefits can be taken into account.
The main problem is that the rules for working out levels of disability benefits, such as Employment and Support Allowance, can become very complicated. Also, different people are, at different times, entitled to different state benefits. You could be entitled to Jobseekers Allowance for a certain length of time - or maybe not.
If you wish to include this figure, click on the checkbox to 'Include State Benefits', and these will be offset against the initial capital sum required. The default figure is set to the average level of disability benefits. However, you can alter this to a different figure if you want to.
Please Note. Due to the complexity of the State Benefits system, and due to the fact that the assumed increase in State Benefits will be calculated at the rate of earnings increases that you have indicated, this calculation will only be approximate. But if you take into account the fact that benefit rules and rates do change on a frequent basis, trying to calculate what State Benefits could be in twenty years time is perhaps trying to calculate the incalculable.
Other main figures that need to be input
After such capital amounts have been calculated, the calculator then assumes that you would need an additional lump sum to pay off all your outstanding liabilities - therefore this is added to any initial capital amount.
Finally, any additional critical illness cover that you already hold, and any liquid assets that are easily accessible (or you could sell to raise additional capital), are taken into account and deducted from the overall figure.
Should I input an amount as a joint figure or not ?
The calculator gives you the options to input all figures either for yourself, your partner, or as a joint figure.
The main reason is that Critical Illness, like life assurance, can be bought on a single-life basis, or on a joint-life basis. The difference being that the first only pays out if you suffer a critical illness - a joint policy would pay out if either life assured suffered a critical illness (although just like life assurance, this can be on the event of the first or the second life assured).
The type of cover that is most suitable depends upon your personal circumstances - it could be the case that you require more than one policy to cover different events.
For a single-person, a single-life policy is the only option. For a couple who are both in employment, it could make sense to take out separate policies to cover care costs and their own individual liabilities, mainly because it is usually more cost-effective to buy insurance on a single-life rather than a joint-life basis. However, if the said couple have a mortgage that they a jointly responsible for, it could make sense to take out a joint-life policy just to cover the costs of the mortgage redemption.
In the scenario where one partner works full time, and the other partner is a full-time child carer, it could make sense to take out joint cover the costs of providing for personal care or child-care, on the basis that:
- If the main earner were not working, there would be no money to pay for a personal carer. This could entail the child-caring spouse having to take on this role. In this scenario, the child-caring spouse may want to return to paid work, but could be prevented from doing so because of these responsibilities
- However, if the cost of meeting all current liabilities falls on the working spouse, and is likely to remain that way for some time, then cover to meet the cost of the mortgage redemption should be done on a single-life basis.
Please note. These are just examples, and the overall levels of cover, and the best way to take out such cover will vary from individual to individual. You should seek Independent Financial Advice if you are in any doubt.
Assuming the above factors are taken into account, the amount of cover that you require is the total of
[Day-One Capital Cost of paying for long-term care costs over a specified period] +
[Cost of settling all debts and liabilities] -
[Existing amount of Cover PLUS Liquid Assets that can be accessed or realised]
This method should enable you to work out a realistic amount of critical illness cover that you should insure your life for.
If you are insuring against future care costs (or lost income), the calculator breaks down the capital costs down on a yearly basis, showing the capital figure needed at each year to continue providing the income in the current year and future years. This breakdown could be retained for capital targeting purposes in the future. (i.e. if you overspend in the early years, your investments need to work harder, or you need to spend less in later years).
After you have calculated the required amount of cover, you may find subsequently find that the cost of providing such cover could be heart-stopping (pun intended) if it is of a substantial magnitude. Critical Illness is certainly not a cheap form of assurance, and not an absolute priority if you have to live within a narrow budget. Therefore, many people effectively have trade off between the amount of cover that they ideally require, and the amount of cover they can actually afford.
When it comes to protecting yourself or your family, life insurance should be the top priority, followed by income protection. Critical Illness should then be added to provide complete financial security.
Consider critical illness to be a 'luxury' form of insurance. If you use an analogy, such as food, compare life insurance to the basics, such as bread and vegetables, and critical illness cover to a luxury chocolate cake. Nice if you can afford it, but not as a replacement for the basic food items.
Please refer to the individual help sections for further guidance on each specific point.
The figures projected by the calculator are only for guidance purposes - whilst we aim to ensure the accuracy of our calculators, we can take no responsibility for the usage made of the calculations generated on this site.