Critical illness insurance pays out a tax-free lump sum if you are diagnosed as having one of the specific life-threatening conditions defined in the policy.

Policies often offer combined life and critical illness cover. These pay out if you are diagnosed with a critical illness, or you die, whichever happens first.

What is covered

Not all policies cover all critical conditions but industry guidelines say that to call itself critical illness insurance, a policy must offer cover for:

· Cancer - but only advanced cases

· Heart attack - if sufficiently severe

· Stroke - if it results in permanent symptoms

In practice, most policies cover more critical conditions than just these three. A basic plan will typically also cover coronary bypass surgery, kidney failure, major organ transplants and multiple sclerosis.

A more comprehensive policy will cover many more serious conditions including loss of sight, permanent loss of hearing and a total and permanent disability that stops you from working. Some policies also provide cover against the loss of a limb.

What is not covered

A policy will provide cover only for conditions defined in the policy document. For a condition to be covered, your condition must meet the policy definition exactly. This can mean that some conditions - such as some forms of cancer - won't be covered if deemed insufficiently severe.

Similarly, some conditions will not be covered if you suffer from them after reaching a certain age - for example, many policies will not cover Alzheimer's disease if diagnosed after the age of 60.

In addition, most policies do not cover any claims made as a result of:

· Self-inflicted injury

· Alcohol or drug abuse

· Flying - apart from normal passenger flights

· Engaging in hazardous sports and pastimes

· HIV- and Aids-related illnesses - unless caught from a blood transfusion, through physical assault or at work in the emergency services, medical profession or armed forces

· Unreasonable failure to follow medical advice

· War and/or taking part in a riot or other civil commotion

Very few policies will pay out as soon as you receive diagnosis of any of the conditions listed in the policy and most pay out only after a "survival period" of typically 28 days. This means that if you die within 28 days of meeting the definition of the critical illness given in the policy, the insurance would not pay out.

Buying critical illness insurance

Because policies vary widely in the cover they offer, the best way to buy critical illness insurance is through an independent financial adviser or a broker specialising in protection insurance.

Not only will specialist advisers be able to trawl through all the policies on the market, they will also be able to advise you on whether a critical illness policy really is appropriate for your needs. An adviser should also be able to help you decide how much cover you need, how long the policy should last and whether you should combine critical illness and life cover.

There is no point buying critical illness insurance if you are already suffering from a critical illness because no policy will pay out. You may also be refused cover if you have already been to see your GP and/or a specialist about a health problem that later turns out to be critical, or if you have had tests for the condition.

It is vital that you give full and accurate answers to all the questions asked when you apply for insurance. Failure to disclose "material facts" which affect an insurer's decision to offer cover can result in claims being turned down.

Premiums

How much you pay for critical illness cover will depend on a range of factors including what sort of policy you have chosen, your age, the amount you want the policy to pay out and whether or not you smoke.

Making a claim

If you have to make a claim, always follow the guidelines in your policy. For example, the policy may stipulate that for a claim to succeed, all diagnoses and medical opinions must be given by a consultant who is a specialist at a UK hospital and specialises in the area of medicine appropriate to your condition. So your GP's diagnosis may not be enough.

And, of course, if the condition you are suffering from does not meet any of the definitions listed in the policy, your claim will be turned down.

Alternatives

A better alternative for many is income protection insurance. This pays a tax-free income if you cannot earn as a result of an accident or any illness - including stress and back pain - not just very exactly defined critical illnesses.