Before spending your critical illness payout you need to draw up a plan – here’s how

Insurance companies say not enough people have critical illness cover that pays out if you have a critical illness, but it is an even bigger problem that most people take out this important cover and have no idea how to use it.

In the aftermath of a major health event, such as cancer or a heart attack, the last thing most people are prepared for is making financial decisions, but for those who had the foresight and guidance to take out severe illness cover, this is also the moment that careful planning pays off, Enrico Louw, general practice principal at Old Mutual Personal Finance, says.

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What do you do when a life-changing, tax-free sum lands in your bank account?

Louw says when your life changes overnight as that money, unrestricted in use and immediate in impact, lands in your bank account, the right advice can restore not just financial balance, but dignity and direction.

“It is at this precise moment that financial advisers step into their most critical role. This is not just where they add value, but where they prove it.

“The claim has been paid. The diagnosis is real. The decisions from here on will shape your recovery, resilience and future security. This is where the plan comes alive and not on a spreadsheet, but in action. It is about translating uncertainty into clarity and a payout into a purpose.”

In his experience, Louw says many consumers are unfamiliar with managing large sums of money and are often uncertain about what to do once the payout lands in their account. “This is where financial advisers must step in with structure and clarity. We do not tell customers exactly how to spend it, but we help them make it count.”

In moments like this, financial advice goes beyond policies and paperwork and becomes a source of calm and control. When it is handled well, the plan not only preserves wealth but helps customers regain their footing.

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Critical illness payout more than a windfall

Louw says your financial adviser will start by identifying your immediate medical funding gaps, particularly when your medical aid has limitations or restrictions, or when you did have gap cover.

“Your financial adviser will start with understanding exactly what your medical aid did not cover. These are often the most urgent expenses and should be paid first using a portion of the lump sum.”

This might include specialist treatment, out-of-pocket hospital fees, or equipment needed for recovery at home.

Louw also stresses the importance of getting proactive advice before the claim stage.

“Many customers are shocked to discover the extent of their medical aid shortfalls. We encourage customers to have gap cover in place long before they need it. It is a simple step that can dramatically reduce financial stress when illness strikes.”

Once your urgent needs are covered, Louw says your financial adviser will focus on your recovery phase. “The financial adviser will consider your needs once you leave the hospital. You can structure the lump sum to provide an income for the next six to 12 months, helping ease financial pressure while you recover.”

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Well-designed strategy to use the critical illness payout

Louw emphasises that a well-designed strategy should meet two goals: ensuring short-term liquidity and laying the groundwork for medium-term financial stability.

He also encourages consumers to ask their financial advisers to think beyond a once-off investment and adopt a layered approach, which might include a mix of interest-earning investments, income replacement strategies and a reserve for unexpected medical or lifestyle expenses.

“The role of the financial adviser is to help you invest the money so that it earns interest and grows over time. However, the funds must remain accessible for when you need it. Liquidity is just as important as growth during your recovery period.”

Equally important is ensuring that the plan reflects your new financial reality after the payout. “Your financial adviser will help you to review your goals based on what has changed, including your health, income and priorities. The lump sum must also be allocated in a way that supports those goals,” Louw says.

“Rather than relying on a one-size-fits-all approach, your financial adviser must tailor the plan to match your personal circumstances, ensuring it remains relevant as your situation changes.”

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What you and your financial adviser should consider

Louw offers these seven practical actions every financial adviser should take in this case:

• Frame the conversation around stability and choice: Position the payout not as a financial windfall but as an opportunity to rebuild. Emphasise the importance of choice, control and long-term security rather than short-term spending.
• Assess immediate medical shortfalls: Start by identifying expenses not covered by medical aid, such as co-payments, specialist procedures, or treatments outside of coverage limits. These are often urgent and need to be addressed first.
• Plan for post-hospital recovery: Build a realistic budget for rehabilitation, mobility aids, counselling, home care, or home modifications. These costs can be significant and are rarely accounted for in standard medical planning.
• Replace lost income: If you are unable to return to work for a period, structure a portion of the lump sum to act as temporary income. This ensures that your day-to-day financial obligations, like rent, school fees or groceries, are not compromised.
• Set aside an emergency buffer: Allocate an accessible reserve to cover unexpected costs that may arise during recovery. This could include complications, additional treatments, or temporary support needs.
• Invest for medium-term stability: Consider placing a portion of the funds in low- to moderate-risk investment vehicles. This can preserve and grow the capital while keeping it available for use within 12 to 36 months.
• Align with existing financial goals: Revisit your broader financial picture and adjust debt repayments, savings strategies and retirement or education funding plans to reflect your new reality after your illness.

Louw points out that a severe illness payout marks a pivotal moment. It arrives amid uncertainty yet offers the potential to restore your financial stability and provide peace of mind.

“With empathy and foresight, a financial plan can transform a lump sum from a payout into a path forward and for the financial adviser, this is not just a professional opportunity. It is the moment where their planning, trust and guidance prove their worth in your time of greatest need.”