If you’re lucky, you’ve probably never had to use critical illness insurance. You’ve likely never even heard of it. But in the event of a big health emergency, such as cancer, heart attack or stroke, critical illness insurance could be the only thing protecting you from financial ruin. Many people assume they’re fully protected with a standard health insurance plan, but the exorbitant costs of treating life-threatening illnesses are usually more than any plan will cover. Read on to learn more about critical illness insurance and whether it's something you and your family should consider.
Critical Illness Insurance 101
As the average life expectancy in the United States continues to increase, insurance brokers are finding ways to make sure Americans can afford the privilege of getting older. Critical illness insurance was developed in 1996, as people realized that surviving a heart attack or stroke could leave a patient with insurmountable medical bills.
“Even with excellent medical insurance, just one critical illness can be a tremendous financial burden,” says CFP Jeff Rossi of Peak Wealth Advisors, LLC.
Critical illness insurance provides coverage if you experience one or more of the following medical emergencies:
- Heart attack
- Organ transplants
- Coronary bypass
Because these illnesses require extensive medical care and treatment, their costs can outstrip a family’s medical insurance policy quickly. If you don’t have an emergency fund or health savings account (HSA), you’ll have an even harder time paying those bills out of pocket.
Many people are now choosing high-deductible health plans, which can be something of a double-edged sword: Consumers benefit from relatively affordable monthly premiums, but could find themselves in a real pinch if a serious illness were to strike. (Read How High-Deductible Health Plans Work for more on costs and coverage.)
Critical illness insurance can pay for costs not covered by traditional insurance. The money can also be used for non-medical costs related to the illness, including transportation, child care, etc. Typically, the insured will receive a lump sum to cover those costs. Coverage limits vary – you could be eligible for a few thousand dollars all the way up to $100,000, depending on your policy. Policy pricing is impacted by a number of factors, including the amount and extent of coverage, the sex, age and health of the insured, and family medical history.
There are exceptions to critical illness insurance coverage. Some types of cancer may not be covered, while chronic illnesses are also frequently exempted. You may not be able to receive a payout if a disease comes back or if you suffer a second stroke or heart attack. Some coverage might end once the insured reaches a certain age. So, like any form of insurance, make sure to read the policy carefully. The last thing you want to worry about is your emergency plan.
Why It May Be Important
You can purchase critical illness insurance on your own or through your employer (many offer it as a voluntary benefit). Adding it on to a current life insurance plan may also save you money.
One of the reasons companies have been keen to add these plans is that they recognize employees are worried about high out-of-pocket expenses with a high-deductible plan. Unlike other health care benefits, workers generally bear the entire cost of critical illness plans. That makes it a money saver for companies, as well as workers.
A big draw of critical illness insurance is that the money can be used for a variety of things, such as:
- To pay for critical medical services that might otherwise be unavailable.
- To pay for treatments not covered by a traditional policy.
- To pay for daily living expenses, enabling the critically ill to focus their time and energy on getting well instead of working to pay their bills.
- 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.
Low Cost but Limited Coverage
Part of what makes these policies appealing is that they generally don’t cost a lot, especially when you get them through an employer. Some smaller plans run as little as $25 a month, which looks like a bargain compared to the cost of a typical, low-deductible health insurance policy.
Despite these plans’ low price tag, some health care experts are skeptical as to whether they really are a good deal for consumers. One overarching concern is that they’ll only reimburse you for a somewhat narrow range of illnesses. If the illness you’re diagnosed with doesn’t fit the definition of a covered illness, you’re out of luck.
The more illnesses that are covered on your plan, the more you’ll pay in premiums. A 45-year-old female with an individual, cancer-only plan may pay $40 a month for $25,000 of coverage. That same woman may pay twice that a month if she expanded the coverage to include coronary illnesses, organ transplants and certain other conditions.
Like all insurance policies, critical illness policies are also subject to a host of stipulations. Not only do they only cover the conditions listed in the policy, they only cover them 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.
Seniors should be particularly careful about these policies. There may be limits for payout on some policies, with persons over a certain age (such as 75) being ineligible for payment, or they may include so-called “age reduction schedules,” which means your potential insurance payout shrinks as you get older.
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. (See: Understanding Your Insurance Contract.)
Alternatives to Critical Illness Insurance
Insiders point out that there are alternative forms of coverage without all these restrictions. Disability insurance, for example, provides income when you can’t work for medical reasons and the financial protection isn’t limited to a narrow set of illnesses. This is an especially good option for anyone whose livelihood would take a significant hit from a prolonged work absence.
Consumers with a high-deductible plan can also make contributions to either a health savings account or flexible spending account (FSA), both of which offer tax benefits when used for qualified expenses. (See Comparing Health Savings and Flexible Spending Accounts for more.)
You can also build a separate savings account to cover non-medical outlays that could arise if you have cancer, for example, and have take leave from your job. (For more on the topic, see Why You Absolutely Need an Emergency Fund.)
The Bottom Line
Since medical bills are a common cause of bankruptcy in the United States, protecting yourself against that fate should be given consideration, especially if you have a family history of any of the illnesses mentioned above. 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, though. As with all types of insurance, you should shop around to find the policy that best meets your needs and situation.