Many of us would love to be able to fritter our money away on non-essential luxuries, such as flashy cars or bling jewellery. But many workers will be surprised to learn that the premiums they pay for critical-illness cover is also being bracketed as a nonessential luxury by Which?, the magazine of the consumer watchdog. It said that consumers may be better off buying life insurance and income protection rather than investing in cover that pays out if they become ill.

So is it time to stop forking out for cover? Unfortunately, it is not that simple. Which type of protection best suits you depends on a complex mix of factors, including your family circumstances, state of health, job and gender. Kevin Carr, head of protection strategy at Lifesearch, the specialist insurance broker, says: “Generally, I would agree with the Which? report. In the absence of income protection, critical-illness cover should not be the first choice.

“What most people are trying to do with this type of insurance is to replace lost income should something happen to them. Income protection pays out in a far wider range of cases — there are many unpleasant and nasty things that can happen to a person that are not covered by critical-illness policies.”

The policies work in different ways. Critical-illness policies pay out a lump sum in the event that you have a serious illness diagnosed or you are permanently disabled. There is a set list of conditions that the policy covers — if you happen to succumb to an ailment that is not on the list, the policy is useless.

Income protection, however, pays out for any condition. These policies pay you a tax-free replacement income if you are unable to work. This income will be paid either until you are well enough to return to work or until you retire or die. Income protection premiums are fixed and do not rise simply because you make a claim. Moreover, if you claim for a particular condition, such as stress, it cannot be excluded by the insurer.

But while income protection can sound like a better deal, this is not always the case. “The important thing about income protection is the definition of ‘unable to work’,” Mr Carr says. Some policies cover you if you are unable to do your own occupation, or one to which you are suited — for example, one for which you have had relevant training. Others, however, pay out only if you cannot work in any occupation, or if you are unable to perform a set number of tasks on a list, such as type on a computer, write your own name and so on.

Obtaining own-occupation income protection may be expensive, particularly for those who have jobs that are classed as relatively high-risk, such as HGV drivers, couriers and window cleaners. “If you cannot get own-occupation or suited-occupation income protection, and if you are on a budget, you should buy critical-illness cover,” Mr Carr says.

One reason why many consumers are wary of critical-illness insurance is that a high proportion of claims on these policies are turned down. But Mr Carr says that the claims statistics are improving. “Two years ago, about one in five claims was declined,” he says. However, many life insurers are now publishing much more encouraging statistics. For example, Legal & General’s claim-rejection rate is down 19 per cent on its 2005 figure, while Standard Life has revealed that it paid 92.5 per cent of claims last year, compared with 82 per cent in 2005.

The vast majority of claims are turned down either because of “nondisclosure” or because their claim does not meet the definition set out in the policy document. Nondisclosure means that the policyholder failed to mention something in the application — or has made a false claim — and so the insurer declines the claim. The problem for many people is that the condition, or fact, that they fail to disclose may not seem terribly relevant to them. The Which? report said: “It sounds extreme, yet failing to tell your insurer about a visit to the doctor about a headache a few years earlier could invalidate a claim if the insurer decides that it is relevant.”

Although Mr Carr says that is not a realistic example, he does advise consumers that “unrelated nondisclosure can be relevant”. For example, if you state on your application form that your weight is 12st (76kg) when, in fact, you weigh 14st, this could be used to deny a claim, even if the reason for your claim has absolutely nothing to do with your weight. If, however, the nondisclosure is accidental, then you can appeal against your claim being turned down. “If it really is accidental, then the ombudsman will rule in your favour,” Mr Carr says. “In about 70 per cent of cases the ombudsman rules in favour of the claimant.”

When considering which policy to buy, you should look carefully at the fine print, in particular at the conditions covered, as well as the definitions of those conditions. For example, most policies cover cancers, but they generally cover only the more serious forms. Early-stage breast cancer, for example, or noninvasive skin cancers may not be covered.

The number of conditions covered by policies also varies dramatically — Egg’s critical illness policy covers only nine conditions, while Bupa’s covers 35. “That difference is not really reflected in the price,” Mr Carr says. On average, you should expect a critical-illness policy to cover about 25 to 30 conditions.

Remember that if you are considering buying protection and you have a family, life insurance should take precedence over protecting your income, and if you have a young family, then family-income benefit may be your best option. This pays out life insurance as income, rather than as a lump sum, and it costs roughly a third less than life cover.

Lifesearch: 0800 3163166

CASE STUDY: Take heart from double payout

Pat Wickson, 55, has always led a healthy and active life. He is a keen cricketer and plays all year — in winter he plays in an indoor league. But two years ago he found himself struggling to keep up.

“It was just after Christmas. I had a cold and couldn’t get rid of it. I was exhausted all the time,” Mr Wickson says. He went to his doctor, and was referred to a specialist who diagnosed a problem with the mitral valve in Mr Wickson’s heart.

“My circulation was not working properly, which was why I was feeling so tired,” Mr Wickson explains. “The problem was detected quickly by the cardiologist in February and I had an operation on the NHS in September.” Although Mr Wickson made a good recovery from his operation and was able to return relatively quickly to the estate agency he runs in Bournemouth, he was able to claim on a critical-illness policy he had with Skandia.

He subsequently discovered that he actually had two critical-illness policies — one came as an add-on to a life insurance policy — and so he was able to claim two payouts.

“It has made my life much easier,” Mr Wickson says. Although he did have to wait a while for the insurers to make their deliberations, obtaining the payout “was not stressful or difficult”.

He has since returned to full health — as well as to the cricket pitch.

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