What Is Critical Illness Insurance?

Definition & Examples of Critical Illness Insurance

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Critical illness insurance is a type of health care insurance that pays you a lump sum if you are diagnosed with a severe illness. It is a type of supplemental insurance that can be purchased in addition to regular health care coverage.

Though you can use your payment however you want, there are restrictions on how much you will receive and which illnesses are covered. Learn how critical illness insurance works and whether the cost is worth the benefit.

What Is Critical Illness Insurance?

Critical illness insurance, also known as critical care insurance, is a type of insurance policy that compensates policyholders with a lump sum payment after they are diagnosed with a severe illness. This payment can then be used at the policyholder's discretion to cover health care or personal costs due to their illness.

The types of illnesses that are covered are listed in the insurance policy. In some cases, the amount you receive will vary based on the illness, with certain diagnoses receiving a 25%, 50%, or 100% benefit payout.

Some critical illness coverages are very limited and may only cover a handful of critical illnesses, whereas others can cover you for a range of conditions.

Critical illness insurance is purchased and paid for separately from normal health insurance, though it can be offered through an employer or by the same companies that offer health insurance.

Alternate name: critical care insurance

How Critical Illness Insurance Works

Like most forms of insurance, critical illness insurance requires paying a monthly policy premium in exchange for an eventual promise of coverage if you become ill.

Policies can offer a range of coverage, from $5,000 to $500,000 lump sum payments depending on your policy and the illnesses it covers. The cost of a policy depends on the amount of coverage you purchase, as well as:

  • Your age
  • Your general health
  • If you smoke
  • If you purchase the coverage as a stand-alone or as a supplement to an existing health or life insurance policy
  • Whether the policy covers just you, you and a spouse, or your entire family
  • How many illnesses are included in the policy's coverage

Some critical care insurance plans will require a health screening to asses your risk factors before you are offered a coverage rate. Others will guarantee coverage without health questions, especially if you already have health insurance through your employer or that insurance company.

Critical illness insurance normally comes with a list of illnesses that are included in the policy. Each policy will outline:

  • Definitions for the diseases or conditions covered
  • When you qualify for a payout
  • If there is a waiting period before you receive your benefit
  • What percentage of your total benefit will be paid
  • What happens if the illness occurs a second time

Once the insurance company pays your benefit, you can use the money to cover your personal or health care costs during treatment, such as:

  • Childcare expenses
  • Living expenses during recovery
  • In-home care
  • Health insurance deductible
  • Uncovered treatment costs
  • Travel to and from treatment

Many plans offered through employers allow you to take your critical illness coverage with you if you leave your job.

What Does Critical Illness Insurance Cover?

The most basic critical illness coverages are cancer, heart attack, and stroke, as these are the most common critical illnesses and leading causes of death worldwide. 

However, comprehensive critical illness insurance can cover many illnesses, including:

  • Heart transplants
  • Coronary bypass surgery
  • Angioplasty
  • Renal failure
  • Organ transplants
  • Alzheimer's disease
  • Multiple sclerosis
  • Cystic fibrosis

Unlike standard health insurance, which pays the costs of medical procedures to the doctors or hospital, critical illness insurance will pay cash directly to you. You then can use the money from critical illness to pay for anything you want.

Do I Need Critical Illness Insurance?

Insurance is both a hedge against future risk and an investment in your peace of mind, but it is always a gamble.

You may pay for years without ever needing the coverage. You may pay for a policy that provides a benefit that is much smaller or much larger than you end up needing. Or you may pay for coverage and end up needing it within just a few years, making it a smart investment.

Policyholders diagnosed with a critical illness can face financial hardships, even when they have comprehensive insurance coverage. Before purchasing critical illness insurance, consider:

  • What is your risk for developing a critical illness in the next 5-10 years?
  • Is anyone else in your family at risk of developing a critical illness?
  • What does your regular health insurance cover?
  • Will you be able to maintain your standard of living if you are unable to work?
  • How can you prepare for unexpected expenses?

A smaller or less comprehensive plan will be more affordable, but the payout may not be enough to cover your necessary expenses if you become ill and are unable to work. A more comprehensive plan will be expensive in the short-term, but it also will include more illnesses and provide better coverage if you do become ill.

Cost vs. Benefit of Critical Care Insurance
$5,000 Policy $60,000 Policy
You pay $11 a month, or $132 a year. You pay $130 a month, or $1,560 a year.
After three years, you are diagnosed with a critical illness covered by the policy. After three years, you are diagnosed with a critical illness covered by the policy.
You spend a total of $396 over three years. You spend a total of $4,680 over three years.
You receive a benefit payout of $5,000, or $4,604 after your premiums. You receive a benefit payout of $60,000, or $55,320 after your premiums.

In addition to considering your financial position, it's important to understand your personal risk when deciding on critical illness insurance. You may need to talk to your doctor about your:

  • Age, as the risk of most cancers and heart disease increases with age
  • Family history of certain diseases
  • Risk factors, like smoking or drinking

Depending on the options you choose for your coverage, you have to weigh the cost of the policy against how much you could end up paying out of pocket for critical illness and how financially ready you are to absorb costs on your own without insurance.

If you can’t afford the costs, then critical illness coverage may be a smart investment for you.

Alternatives to Critical Illness Insurance

Like other forms of supplemental insurance, critical illness insurance is optional and may not be the best choice for everyone. There are alternatives that you can consider.

  • No supplemental insurance: If you are in your 20s or 30s and fairly healthy with no risk factors, you may not need critical illness insurance yet. You may also choose to forgo supplemental insurance if you have very comprehensive health insurance.
  • Cancer-only insurance: Cancer affects more than 30% of the United States population, unlike many other critical illnesses which are much less common. Some companies that offer critical illness insurance also offer limited cancer-only insurance. This also may be a good choice for you if you have a high risk of cancer.
  • Combined policies: Some insurance policies offer the option to combine critical illness with other coverages like life insurance, accident insurance, or disability insurance. This may be a good financial strategy if you want to maximize insurance coverage and not have to pay for several policies.

Key Takeaways

  • Critical illness insurance is a type of supplemental health care insurance that pays a lump sum to policyholders who are diagnosed with a severe illness.
  • Policies can offer a range of coverage, from $5,000 to $500,000 lump sum payments depending on your policy and the illnesses it covers.
  • You can use the benefit payout to cover your personal or health care costs during treatment.
  • Younger and healthier people may not need critical care insurance. For older people or those with risk factors, it may be a smart investment.

Article Sources

  1. Delaware Department of Human Resources. "Critical Illness Insurance." Accessed June 22, 2020. 

  2. State of Alaska Department of Administration Retirement and Benefits. "Critical Illness Supplemental Insurance." Accessed June 22, 2020.

  3. Michigan Civil Service Commission. "Critical Illness Insurance Including Cancer." Accessed June 22, 2020.

  4. AHA Journals: Circulation. "Shared Risk Factors in Cardiovascular Disease and Cancer." Accessed June 22, 2020.

  5. American Association for Critical Illness Insurance. "What Is Cancer or Critical Illness Insurance." Accessed June 22, 2020.

  6. American Cancer Society. "Cancer Facts & Figures 2020," Page 4. Accessed June 22, 2020.

  7. United Healthcare. "Critical Illness Insurance: Combined Plans." Accessed June 22, 2020.