Proposals from the Association of British Insurers (ABI) to introduce two levels of cover for cancer in critical illness insurance policies have been resoundingly rejected by insurers, financial advisers, regulators and medical experts.

Critical illness insurance makes a single cash payout on diagnosis of a serious, often life-threatening, illness such as stroke, heart attack or most forms of cancer. Such insurance tends to be expensive and the ABI has been consulting on redefining policies to keep payouts and premiums down.

One of its main proposals was to introduce two levels of cover for cancer. The first, more expensive, policy would continue to pay out on a wide range of cancers as soon as they were diagnosed. The second would offer much more restricted cover, only paying out when the cancer was more advanced and spreading into the surrounding tissue.

The proposal was heavily condemned by cancer charities when it was first published, and according to a member of the ABI's critical illness committee, the insurance industry, trade and consumer bodies have been equally critical in their responses to the consultation, which closed at the end of November.

Kevin Carr, of independent financial adviser Lifesearch, believes such a move would be dangerous for prospective policyholders: 'People won't realise that the cheaper policies will only pay out in extreme cases. They will see the word "cancer" and think that they qualify for a payout automatically if they develop the disease.'

Fay Goddard, of the Association of Independent Financial Advisers, also dislikes the two-tier strategy: 'Our understanding is that you could have a full mastectomy and a restrictive policy still would not pay out. To tell someone they are only seriously, not critically, ill when they are having invasive surgery is not acceptable.'

If adopted, the proposal would mean that 34-year-old Kim Smith, who was diagnosed as suffering a very aggressive form of breast cancer last year, would not be entitled to a payout. She discovered she had a lump in her breast after banging into folders at work. Her cancer was in its very early stages and had not spread and she was treated as part of a trial with eight doses of chemotherapy.

Her insurer, Friends Provident, paid out £27,000. 'I would have coped without the money,' she says. 'But it enabled us to pay off our debts, treat the children a bit and gave me peace of mind.'

A second ABI proposal to 'future-proof' the definition of illnesses has received a more positive response. Insurers are concerned that scientists may develop tests that enable the diagnosis of serious illnesses many years before symptoms become apparent. Not only would this deprive the company of the necessary premiums to support payouts, it also moves away from the original concept of the policy as protection for sufferers and their families against costs incurred as a result of critical or terminal illness.

Carr believes that some form of future proofing is necessary to keep critical illness insurance affordable: 'In the future you might be able to diagnose someone with motor neurone disease 20 years before they actually developed symptoms.'

However, Goddard says that people who have longstanding critical illness policies should think very hard before switching them for new, cheaper versions, especially if the ABI's proposals are adopted.

She says that older policies usually provide better cover, and warns that by switching on the grounds of cost, policyholders could miss out on a payout if they develop an illness covered by their old policy but not by the new one. And whereas old-style policies have premiums fixed at one level for their entire term, new-style policy premiums are reviewable - invariably upwards - every five years.

She is particularly concerned about those who have bought critical illness insurance as an add-on to an endowment: 'The further back policies go, the more likely they are to have a broad definition of illnesses. The terms offered by critical illness insurance linked to endowments are very good, and policyholders should think very carefully about surrendering or stopping payments, because it would mean losing critical illness cover.'