What Is Catastrophic Illness Insurance?

Catastrophic illness insurance is a type of coverage that protects the insured for a specific and severe health problem over a defined period. It differs from other forms of health insurance in that there is limited coverage to the specifically named risk. An individual can buy the coverage as a stand-alone policy or as a rider to life insurance

This insurance is also known as critical illness and critical care insurance. 

Key Takeaways

  • Catastrophic illness insurance is a type of coverage that protects the insured for a specific and severe health problem over a defined period.
  • An individual can buy the coverage as a stand-alone policy or as a rider to life insurance, which is focused on the specific health risk.
  • The need for catastrophic illness insurance depends in large part on the healthcare system of the country, and whether or not certain health risks would be covered.

Understanding Catastrophic Illness Insurance

Catastrophic illness insurance is limited to particular illnesses that may require long-term hospitalization or advanced treatment techniques. In most cases, catastrophic illness insurance can supplement a beneficiary's present health and disability coverage plans. Some life insurance policies offer additional benefits for critical illnesses known as dread disease riders

Catastrophic coverage may not include pre-existing conditions and usually includes an elimination period. The elimination period usually starts on the date that your diagnosis renders you unable to work. Illnesses may need the diagnosis by a second physician or specialized test completed before coverage. Further plans may require full medical underwriting.

Coverage From Catastrophic Illness Insurance

Some plans may offer flexibility on how the money is allocated or provide a lump sum, tax-free cash benefit to cover the care for a qualified illness. That means the funds may help to cover the out-of-pocket deductible and copay expenses. Other providers may offer plans which pay regular income installments.

However, these plans may carry a lifetime benefit cap, and elimination periods will vary by the insurance provider. Covered illnesses can include heart attack, stroke, paralysis, organ transplant, renal failure, carcinoma, and other diseases.

In 2020, in the U.S., the average national cost of health insurance per month was $456 for an individual and $1,152 for a family.

As medical diagnosis and treatments advance, more patients receive successful treatment for critical illnesses, but these advancements come at a cost. Inflation and the cost of providing medical care for large numbers of individuals who may be under- or uninsured add to the cost of medical care.

Also, the cost to develop and implement the advancements in medical treatments and drug research and development have driven the costs higher. Catastrophic illness insurance helps individuals pay for medical care in this high-cost environment. 

Other comprehensive types of health insurance will cover most medical expenses, although co-payments, deductibles, and other out-of-pocket costs may limit the benefits. The costs associated with critical diseases can be substantial, cause financial distress, and even bankruptcy, thus necessitating catastrophic illness insurance. 

Special Considerations

The need for catastrophic illness insurance depends to no small extent on a country’s healthcare system. In many nations, various forms of universal coverage make affordable medical care services available to all citizens.

The structure of such coverage can vary. In some cases, countries provide subsidies to private insurance companies and private providers of medical products and services. In other cases, the government may be the single-payer for most expenses.

In 1988, President Ronald Regan passed the Medicare Catastrophic Coverage Act. The program was focused on helping older Americans cope with the expense of long-term health issues.

The Affordable Care Act (ACA) of 2010 aimed to reform health care, and government data suggests that over 31 million Americans benefited from insurance coverage under this law as of 2021.

What Illnesses Are Covered Under Critical Illness Insurance?

Critical illness insurance covers heart attacks, strokes, angioplasties, kidney failure, organ transplants, bypass surgeries, advanced Alzheimer's, and paralysis. Depending on your insurance, you can include a rider that expands what critical illness insurance covers.

Is Diabetes a Critical Illness?

In most critical illness policies, diabetes is not considered a critical illness. In some cases, late-onset Type I diabetes counts as a critical illness. Much of what is accepted will depend on your carrier as well as the country that you have health insurance in.

Is It Worth It to Get Critical Illness Insurance?

Choosing if critical illness insurance is right for you will depend on a variety of factors. These factors include what your regular health insurance covers, your current health, your age, your family medical background, and your financial situation. The older you get, the more costly critical illness insurance is.