If you have dependants to protect, your first priority should be making sure that you have adequate life insurance. Whether you have dependants or not, if you would be in serious financial difficulty if you could not earn because of any sort of ill health or injury, you should consider buying permanent health insurance.

If you already have your life and earnings covered, it is unlikely that you need critical illness insurance. However, if you are single and do not need life insurance because there is no one who is financially dependent on you, this sort of insurance might be worth considering.

Critical illness insurance – previously called ‘dread disease insurance’ – is designed to pay out a tax-free lump sum (not income) if you are diagnosed as having one of a defined list of life-threatening conditions. Because it is designed to cover the costs of living with the illness, most policies require you to survive at least four weeks (called the ‘deferred period’) after diagnosis for a claim to be valid.
If the policy pays out, you can use the money in any way you choose: for example, you could pay off the mortgage, cover living expenses for a time, pay for private medical treatment, adapt your home or take a holiday.

Nearly two thirds of the population suffer a critical illness at some time in their lives. In the past, they would often have died, but advances in medical science mean that more people with a critical illness are likely to survive for a significant time.
For example, 40 per cent of cancer sufferers survive for five years or longer, and nearly half of the 130,000 people a year who suffer their first heart attack will survive for 13 years or more.
This could mean having to manage on a reduced income if you had to give up work or change job. You might also need to buy special equipment or modify your home to cater for reduced mobility.
It is easy to see that the lump sum that critical insurance might pay out could be very useful at such a difficult time.
However, although the flexibility of having a lump sum may seem attractive, critical illness insurance should not be regarded as a substitute for permanent health insurance if you would be in serious financial difficulty if you could not work due to ill health.
The reason for this is that permanent health insurance covers more illnesses and can provide a monthly income for as long as you cannot work (up to retirement age if necessary), which is particularly important for self-employed people who cannot rely on the cushion of sick pay from an employer.
Although permanent health insurance will pay out only after you have convinced the insurer that you are unable to work, it will cover both critical and non-critical illnesses such as stress and back pain if they prevent you from earning.
Despite the fact that permanent health insurance should be a higher priority and more suitable than critical illness insurance for most people, sales of critical illness insurance have risen sharply in the past few years while sales of permanent health insurance have remained fairly static.
One reason for the difference in sales could be that, on the face of it, critical illness insurance is cheaper and simpler than permanent health insurance.
However, it is worth bearing in mind that you may pay less because you get less in terms of what is covered.
You should also be aware that because the payment from a critical illness policy is a lump sum, once it is spent, you do not get any more.
With a permanent health insurance policy the replacement income carries on being paid as long as it needs to be paid; there is no limit on the number of claims you can make – provided you are still paying the premiums and provided that the claims are valid.