The insurance that will only pay out if you lose two limbs, not one

Critical illness insurance can be a lifeline for people when it works. If you unexpectedly end up diagnosed with cancer, and need to spend several months off work being treated, an injection of cash can help wash away any financial worries, and leave you to focus on getting better.

The problem, however, is that like all insurance policies, it has its limitations. Most insurers have a list of between 25 and 50 conditions which the policy covers - and while this includes all the major serious illnesses, there are plenty which don't make it onto the list. Furthermore, in many cases, insurers require that your "critical illness" is of a certain severity before they'll pay out. So while heart attacks may be covered, you won't be paid out if your heart attack is not a bad one (as measured by an analysis of cardiac enzymes in your body).

It's understandable that an insurance company needs to find ways of limiting its liability. But the difficulty of creating a relatively short list of claimable medical conditions is that many serious illnesses may not be covered. In one case I heard of recently, someone with a serious bowel condition, who needed a life changing operation followed by many months of recovery, was turned down because their condition "was not on the list".

Losing one limb is not enough

At the more extreme end of the scale, there was another case a few years ago where someone was turned down after losing a leg. Although the policy did cover loss of limbs, the small print stipulated that two limbs needed to be lost before a payout would be made. Astonishingly, this particular part of the policy was taken directly from the Association of British Insurers' recommended policy wording for critical illness policies. And some insurers - including Scottish Provident - still use that wording. Loss of one limb is apparently not critical. Only loss of two.

There's no easy way to solve the problems with critical illness cover. It's impossible to engage the customer around what is and isn't covered at the time they take out their policy. Most of the list of illnesses mean nothing to most people - and only mean anything to medical professionals and the patients who suffer from them. So when a customer buys critical illness cover, they understandably enter into a contract where they assume they will get paid out if they suffer from what they believe to be a critical illness, not what someone else deems to be critical. Only when put in their claim - after suffering the devastation of the diagnosis, followed by the relief that they at least have some insurance - do they discover that their policy won't pay out. Heartache.

Critical illness cover was not deisgned for the UK

Critical illness cover was first invented 30 years ago by a doctor in South Africa, who had seen the devastation caused for families who became seriously ill and were unable to afford their healthcare. But that was in a private system - and in a world where lower income families could not afford proper health coverage, critical illness insurance was a valuable lower cost stop gap. Even with its limitations, it gave people the peace of mind that if they got one of the most common serious illnesses, they would have the money to pay for healthcare.

Over here, the landscape is different. We have a socialised healthcare system, where nobody has to fear that they won't be treated if they get ill. This has meant that critical illness cover has evolved to be used as a poor substitute for other forms of protection.

If it is loss of income that people are worried about, then they should be buying income protection insurance. Or if they can't afford that, then maybe a cheaper alternative such as mortgage payment protection insurance, which can at least ensure their mortgage gets paid if they can't work. Importantly, these policies pay out if you can't work, rather than making a judgement about how serious your illness is.

Critical illness cover should be the last protection product that people buy. It's a luxury that should come after you've got life cover and income protection. But insurers muddy the waters by rolling it together with life insurance - which has the effect of cannibalising the income protection market.

I'd like to see critical illness cover stripped out of life insurance and sold separately - with customers having the limitations of the insurance made as clear as daylight to them. And it's about time that the Association of British Insurers updated its model terms too.

A product that comes with built in dissatisfaction for a segment of customers detracts from the enormous task of rebuilding trust between consumers and insurers. Furthermore, as things stand, critical illness is acting as a barrier to closing what the industry call "the protection gap" - the gap between the insurance that people need and what they have.