What Is Critical Illness Insurance?

Important Facts About Critical Illness Insurance


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With so many types of health insurance available, it is hard to decide which types of supplemental insurance you need. Securing your and your family’s financial stability with insurance like critical illness, long-term care or life insurance can be a good idea in some circumstances. Before deciding what kind of insurance product to invest in, it is helpful to understand how they work and what critical illness insurance is.

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 getting diagnosed with a specific illness that is listed on their insurance policy. Critical illness insurance policies can also be structured to make serial payments based on the policyholder's ongoing medical treatments and condition.

What You Need to Know About Critical Illness Insurance

  1. Some critical illness coverages are very limited and may only cover a handful of critical illnesses, whereas others can cover you for a vast range of conditions, listing 30 or 36 coverages.
  2. There are always conditions before you get your cash payout on a critical illness policy. It is important to do your research before you invest in this kind of insurance.
  3. Some insurance policies offer the option to combine critical illness with other coverages like life insurance, accident insurance, or disability. This may be a better strategy if you want to maximize insurance coverages and not have to pay for several policies.

How Does Critical Illness Insurance Work?

Critical illness insurance normally comes with a list of illnesses that are included in the policy. Each illness will have criteria that define when you qualify for a payout. There are many cases where people think they will get covered because they have been diagnosed with cancer, for example. But then the wording of the policy itself has criteria that must be met, and if it is not, the critical illness claim may be denied. It is important to review payout conditions of a critical illness policy carefully, as well as how the policy defines the disease or condition and if there is a waiting period.

Examples of Critical Illness Insurance Coverages

According to the American Critical Illness Association, the most basic critical illness coverages are cancer, heart attack, and stroke. This list can be expanded to include many more critical illnesses, like a heart transplant, coronary bypass surgery, angioplasty, kidney (renal) failure, and other organ transplants. Many policies cover between 30 and 36 critical illnesses.

According to the American Cancer Association, 1 in 3 people run the risk of developing cancer. The American Heart Association reports that over 320,000 out-of-hospital cardiac arrests occur annually in the United States.

Is Critical Illness Insurance Worth It?

Insurance is always a gamble. 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 for you.

Example of Cost vs. Benefit of Critical Illness Coverage

For example, if you are paying $50 a month for $5,000 of critical illness insurance, that’s $600 a year.

If you pay for your policy for 3 years, with no illness, but then in the 4th year have a critical illness covered by the policy, then the $600 paid over 4 years (totaling $2,400) becomes money well-spent when you get a payout of $5,000.

However, if you never have a critical illness, then that $600 a year may have been better spent by putting into a savings account or HSA, after 8 or 9 years, you’d have enough to cover that same $5,000 on your own and might even benefit from the tax advantages of an HSA over the long term.

A larger critical illness policy will cost more, but will pay out a higher lump sum. When you are looking at the potential payout of $25,000, this amount of money can help out a lot more than the smaller policies and may be something to consider when you are assessing how valuable a critical illness policy is to you.

Factors Determining the Price of Critical Illness Coverage

  1. The amount of lump sum cash payment you would like to have
  2. Your age
  3. Your general health
  4. If you smoke
  5. If you purchase the coverage as a stand-alone or as an endorsement to an existing policy like term life insurance

What Are the Options for Critical Illness Coverage?

There are two sets of options to consider:

  • Coverage amount or how much you want as the cash payout if you are diagnosed with a covered serious illness
  • What illnesses qualify 

You can purchase a critical illness insurance plan for dollar amounts up to $500,000. Although most people will purchase plans for smaller amounts from $5,000 up to $25,000.

You can choose a policy with minimal serious illness coverage, or choose a more broad policy that covers the 30 or 36 critical illnesses.

What Does Critical Illness Lump Sum Cash Pay For?

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 can use the money from critical illness to pay for anything you want.

Some people use critical illness policy money to:

  • Help pay for home care and costs during rehabilitation 
  • Pay bills, like mortgage or basic living expenses
  • Pay for the deductible in your health insurance plan and avoid medical debt

The Bottom Line

Policyholders diagnosed with a critical illness can face financial hardships, even when they have comprehensive insurance coverage. Before purchasing critical illness insurance, you should ask your financial advisor to weigh the best options. How can you cover lengthy recoveries that will require you to miss work? How can you maintain you living standard? And, how can you prepare for unexpected expenses?