Critical Illness and Long-Term Care Cover: UK Options

By CareFinder Team · Published 2026-06-30 · Last reviewed 2026-09-18

Critical illness cover pays a one-off lump sum if you are diagnosed with a listed serious condition, and suits working-age people with a mortgage or dependants. It is not designed to pay care fees. For later-life care, the main insurance option is a care fees annuity bought when care is needed, which pays a guaranteed income to the care provider for life, free of income tax.

Critical illness cover and long-term care cover solve different problems. Critical illness cover pays a lump sum if you are diagnosed with a serious illness, usually during your working life. Paying for care in later life is a different risk, and the main insurance product for it is a care fees annuity, bought at the point care is needed.

This guide explains both, and how they fit with council funding, the NHS and benefits. Council funding rules below are for England; Scotland, Wales and Northern Ireland differ. It is general information, not financial advice: speak to an FCA-regulated adviser before buying any policy.

What is critical illness cover?

According to Citizens Advice, critical illness insurance pays a lump sum if you are diagnosed with certain serious illnesses or disabilities, such as a heart attack, stroke, some cancers, multiple sclerosis or Parkinson's disease. Key points:

• It pays once, and then the cover usually ends.
• Each policy lists the conditions it covers and how severe they must be. You usually have to be very ill before you can claim.
• You must give the insurer full, honest details of your own and your family's medical history. If you don't, a claim could be refused.
• Existing conditions may be excluded or make the cover dearer.
• You normally have 30 days to cancel for a full refund, if you have not claimed.

It is usually bought for a set term, such as the length of a mortgage, and suits people with dependants, debts or a household that relies on their income.

Does it help with care home fees?

Not directly. The lump sum can be spent on anything, including care, but most policies end before the age at which people usually need long-term care, and the conditions covered do not match the gradual frailty or dementia that often lead to it.

What long-term care cover is available?

If you already have a long-term care policy

Some people hold older policies bought years ago to pay towards future care. If you have one, keep paying the premiums if you can, and check what triggers a claim and what it pays.

Care fees annuities (immediate needs annuities)

A care fees annuity, also called an immediate needs annuity, is bought when someone already needs care. In return for a lump sum, an insurer pays a regular income towards care fees for the rest of the person's life.

• Tax: under section 725 of the Income Tax (Trading and Other Income) Act 2005, payments are free of income tax when paid directly to a care provider or a local authority for the person's care.
• Certainty: the income continues however long the person lives, which protects against savings running out.
• Price: it depends on age, health and the income needed. Poorer health usually means a lower price.
• Risk: if the person dies soon after buying, most of the lump sum may be lost unless capital protection was added at extra cost.

Some insurers also offer deferred plans, where payments start after a set period, which can cost less. These are complex products, so only buy one after advice from a specialist regulated adviser.

What does the state provide first?

Before buying any product, check what help is available:

• Council funding. In England, the council means-tests people who need care. For 2026/27 the upper capital limit is £23,250: above it you usually pay the full cost; below it the council contributes.
• **NHS Continuing Healthcare.** If needs are primarily health needs, the NHS pays in full and there is no means test. Ask the integrated care board for an assessment.
• **NHS-funded nursing care.** A weekly payment towards nursing in a nursing home for people who need a registered nurse.
• Benefits. Attendance Allowance is not means-tested and helps people over State Pension age who need care, including self-funders in care homes.
• Scotland provides free personal care for people assessed as needing it, though accommodation costs in a care home are still charged.

What other ways are there to pay for care?

• Savings and income, including pensions.
• Deferred payment agreements, which let someone use the value of their home to pay care home fees without selling it in their lifetime, with the debt repaid later. Councils must offer them to people who meet the criteria, set out in the Care and Support Statutory Guidance.
• Equity release, such as a lifetime mortgage, which can fund care at home but reduces what you leave and can affect means-tested benefits.
• Renting out the home, where a deferred payment agreement is in place or the home is not needed.

What should you watch out for?

• Giving money away to avoid care fees can be treated as deprivation of assets, and the council may assess you as if you still had it.
• Affordability: a large lump sum into an annuity leaves less for other needs, so plan for top-ups, extras and changes in care.
• Advice: care fees annuities and equity release should only be bought after advice from an FCA-regulated adviser who specialises in later-life care. Ask whether the adviser specialises in later-life and care funding advice.
• Complaints: if an insurer turns down a claim unfairly, complain to the insurer first and then to the Financial Ombudsman Service.

Frequently asked questions

Is critical illness cover worth it for older people?

Premiums rise with age and health, so it becomes expensive later in life, and cover usually ends at a set age. It is most useful for people whose household would struggle if they could not work.

Can I buy insurance now to pay for care I might need in the future?

Options are limited. If you already have an older long-term care policy, keep it. Otherwise, most families fund care from savings, income, property and state help, and consider a care fees annuity only once care is needed.

Is an immediate needs annuity taxable?

Payments made directly to a care provider or local authority for the person's care are free of income tax. Payments made to the person themselves may be taxed.

Does a care fees annuity affect council funding?

It is designed for people paying their own fees. Buying one uses up capital, so talk to an adviser and the council about how it would be treated in any future means test.

What if a critical illness claim is refused?

Ask the insurer for its reasons in writing and use its complaints process. If you are still unhappy, you can take the complaint to the Financial Ombudsman Service, which is free. Citizens Advice can help you prepare it.

Key takeaways

• Critical illness cover pays one lump sum on diagnosis of listed conditions; it is not a care-funding product.
• A care fees annuity pays a lifelong income towards care, free of income tax when paid to the provider.
• Check council funding, NHS Continuing Healthcare and Attendance Allowance before buying anything.
• Deferred payment agreements let people use their home without selling it in their lifetime.
• Take regulated, specialist advice before buying any care-related financial product.