Contracting a serious illness or disease can be devastating - both to your health and to your finances. Should you be unable to work due to failing health, you may find yourself unable to pay for basic needs or necessary medical care, adding worries about money to worries about your health. Critical illness insurance is designed to alleviate your financial concerns should you find yourself facing life-threatening health problems. It's no cure-all, but if you fall prey to a bout of very ill health, at least you'll be able to focus your attention on getting well, rather than on making ends meet.
Definition and History
Critical illness insurance provides a lump-sum payment within 30 days of the time the policyholder receives a diagnosis. Such policies cover a host of diseases, including:
- heart attack
- the need for an organ transplant
- a variety of lesser-known diseases (some policies cover more than 100 conditions)
(For information on choosing a healthcare plan that meets your needs, read How To Choose A Healthcare Plan.)
This type of insurance was first offered in South Africa in 1983. It has since become quite popular in Europe, Australia and Canada. Its popularity is particularly high in countries that offer nationalized healthcare. Citizens in these countries know that their healthcare bills are paid, so they take this insurance to cover living expenses while they are unable to work. Critical illness insurance policies are starting to gain popularity in the United States, where inadequate health insurance is a national problem that financially devastates thousands of families each year. (Read Steering Clear Of Medical Debt to learn how you can avoid financial disaster when a medical emergency strikes.)
The value underlying critical illness insurance is that the money can be used for a variety of things:
- In the U.S., the money can be used by those lacking health insurance to pay for critical medical services that might otherwise be unavailable.
- It can also be used by the insured to pay for treatments not covered by their policies.
- The money can be used to pay for daily living expenses, enabling critically ill persons to focus their time and energy on getting well instead of working to pay their bills.
- It can also be used for transportation expenses, such as getting to and from treatment centers, retrofitting vehicles to carry scooters or wheelchairs and installing lifts in homes for critically ill patients who can no longer navigate staircases.
- Terminally ill patients, or those simply in need of a restful place to recuperate, can use the funds to take a vacation with friends or family.
(Read The Evolution Of LTC-Insurance Plans for more varied coverage options.)
Like all insurance policies, critical illness policies are subject to a host of stipulations. They only cover the conditions listed in the policy and only under the specific circumstances noted in the policy. A diagnosis of cancer, for example, may not be enough to trigger payment of the policy if the cancer has not spread beyond the initial point of discovery or is not life-threatening. A diagnosis of stroke may not trigger a payment unless the neurological damage persists for more than 30 days.
Other restrictions may include a specific number of days the policyholder must be ill or must survive after diagnosis. There may also be limits for payout on some policies, with persons over a certain age (such as 75) being ineligible for payment.
It is important to note that many of these policies do not provide a guaranteed payment. For example, a typical insurance company discloses that in its critical illness policy "the expected benefit ratio for this policy is 60%. This ratio is the portion of future premiums that the company expects to return as benefits when averaged over all people with this policy." If 60% of the premiums are eventually paid out in claims, 40% of the premiums are never paid out at all. (Read Exploring Advanced Insurance Contract Fundamentals to make sure you know what you're covered for.)
New developments in the critical insurance market are enhancing the features and benefits provided by these policies. Some now offer guaranteed payouts at death and riders for recurrence of disease. While these new features provide added financial security for beneficiaries, they also result in increasing the cost of the policies. (Learn more about insurance riders in Let Life Insurance Riders Drive Your Coverage.)
Shopping for Coverage
Critical illness insurance is often purchased by:
- persons in high-risk professions who may be unable to secure traditional disability insurance
- persons with inadequate health insurance coverage
- the self-employed
- anyone that expects to be in need of financial assistance should illness make it impossible to earn a living (If you fall into one of these categories, read Buying Private Health Insurance for more information on available coverage.)
Policy pricing is impacted by a number of factors, including:
- the amount and extent of coverage
- the sex, age and health of the insured
- family medical history
A number of insurers offer these policies, so comparison shopping will help consumers identify the most appropriate policy for their needs. (Learn more about how insurance companies determine their prices in Can I Get Life Insurance?)
Critical illness insurance can alleviate financial worry in the event that you become too sick to work. It provides flexibility in that the money paid out can be used as you wish, to cover a wide variety of potential needs. There are some drawbacks and stipulations to this type of insurance coverage, of course, but these may be partially offset by new insurance products. As with all types of insurance, shop around to find the policy that best meets your needs and situation.