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 does not come with most standard health plans, but is rather a form of supplemental health insurance. This means you can purchase it as an add-on to your current health plan, or on its own.

Though you can use your lump sum payment in any way you please, there are limits on how much you will receive and which types of illness are covered. Learn how critical illness insurance works and whether the cost is worth the payoff.

Key Takeaways

  • Critical illness insurance is a type of supplemental health care insurance that pays a lump sum to policyholders who come down with a severe illness.
  • Plans can offer a wide range of payouts, from $5,000 to $500,000 in lump sum payments. The exact amount depends on your contract and the illness.
  • You can use the payout to cover a wide range of costs during treatment, whether for health care or other reasons.
  • People who are young and healthy may not need critical care insurance. For older people or those with risk factors, it may be a smart purchase.

What Is Critical Illness Insurance?

Critical illness insurance is a type of insurance policy that compensates policyholders with a lump sum payment if and 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.

Critical illness insurance is purchased and paid for separately from normal health insurance. You may find that it is offered as part of a full health care package from your employer, or by the same companies that offer other standard health plans.

Some critical illness plans are very limited, and may only cover a small handful of illnesses, whereas others can cover you for a vast range of ailments or illnesses.

The types of illnesses that are covered will be listed in your contract. In most cases, the amount you receive as a payout will vary based on the illness.

Alternate name: critical care insurance

How Does Critical Illness Insurance Work?

Like most forms of insurance, if you purchase a critical care plan you will need to pay a monthly policy premium. It's a contract, and paying your bill each month is the deal you make in exchange for a promise of future bulk payment in the event that you become ill.

Cost and Payoff

There are plans at many levels, that cover narrow or wide range of costs, and with lump payments from as little as $5,000, all the way up to $500,000. The exact amount will depend on your contract and what it covers, as well as a few other factors. These include:

  • Your age
  • Your health and risk factors
  • Whether you purchase the plan as a standalone or as an add-on to a current health or life insurance policy
  • Who the plan will cover, whether just you, or you and a spouse, children, and any other members
  • The number and types of illnesses that fall under its scope
  • Whether you smoke or use tobacco products

Some critical care plans will mandate a health screening to assess your risk factors before they offer you a rate or any type of quote. Others will promise to cover you without any health questions. This tends to happen only if you have a standard health plan through your employer or through the same insurance company.

Plan Details

Critical illness insurance often comes with a list of illnesses that are included in the policy, as well as details you'll need to make a claim, such as:

  • How each disease or condition is defined
  • When you are eligible for a payout
  • If you must wait for a set amount of time before you receive your payout
  • What percent of your total benefit will be paid
  • What happens if the illness occurs a second time

How Payout Funds Can Be Used

Once the insurance company pays your benefit, you can use the money to cover any costs that come up during treatment, whether they are for health care or not. These may include:

  • Living costs during your recovery time
  • In-home care
  • Treatment costs that are not covered by the plan (or by a standard health plan)
  • Travel to and from treatment
  • Deductibles, copays, and other extra costs that may come out of pocket
  • Childcare costs

If you're thinking about signing up for a critical illness plan offered through your employer, be sure to ask whether you'll be able to take it with you if you leave your job.

What Does Critical Illness Insurance Cover?

The most basic critical illness coverages are for cancer, heart attack, and stroke, as these are some of the most common severe illnesses and leading causes of death across the globe.

But you can also find more comprehensive plans that cover a wider range of illnesses, such as:

  • Angioplasty
  • Kidney failure
  • Organ transplants
  • Alzheimer's disease
  • Multiple sclerosis
  • Cystic fibrosis
  • Paralysis
  • Severe burns

Unlike standard health plans, which pay the costs of medical procedures to the doctors or hospital, a critical illness plan will pay you, and in cash (or check). You then can use this money to pay for any cost that comes up while you're on the mend, without limit.

Do I Need Critical Illness Insurance?

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

You may pay for years without ever needing to file a claim or cash in on a payout. You may pay for a plan that provides a benefit that is much smaller or much larger than you end up needing. Or you may pay for a plan and end up needing it within just a few years, which would make it very worth the purchase price indeed.

Factors to Help You Decide

If you are diagnosed with a critical illness you can still face financial hardship, even when you have the most comprehensive coverage. Before you purchase a critical illness plan, think about these factors:

  • What is your risk for coming down with a severe illness in the next 5 to 10 years?
  • Are other members of your family at risk of falling critically ill? (Or have they in the past?)
  • What does your standard health plan cover?
  • Will you be able to maintain your standard of living if you can no longer work?
  • How can you best prepare for surprise costs that you can't predict?

Plans Come in Many Sizes

A smaller or more narrow plan will be cheaper, but the payout may not be enough to cover all of the costs that come up if you become ill and can no longer work. A plan with greater coverage will cost more in the short-term, but it will also cover a wider range of illnesses, and provide a better payout if you do become ill.

See below for an example of how a critical care plan would play out for three years, at two price points.

Cost vs. Benefit of Critical Care Insurance at Two Price Points
$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 an illness covered by the plan. After three years, you are diagnosed with an illness covered by the plan.
You spend a total of $396 over three years. You spend a total of $4,680 over three years.
You receive a payout of $5,000, or $4,604 after you account for your premiums. You receive a payout of $60,000, or $55,320 after you account for your premiums.

Of course when you are looking to purchase a policy you'll have to think about cost, and whether the monthly payments fit into your current budget. You should also think about your health, your future health, and any personal risk for illness that you're aware of. 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

Then, depending on the options you choose for your coverage, you'll have to weigh the cost of the plan against how much you could end up paying out of pocket for should you fall critically ill. Ask yourself whether you can absorb these costs on your own without insurance.

If you can’t afford the costs, but are high risk, then critical illness coverage may be a wise purchase for you.

What if I Opt Out of Critical Illness Insurance?

Like other forms of supplemental insurance, critical illness insurance is an option, not a mandate, and may not be the best choice for everyone. There are many other alternatives you can consider:

  • Skip the extras: 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 your standard health plan is very good.
  • Cancer-only plan: Unlike many other severe illnesses which are not so common, cancer affects more than 30% of people in the U.S. Some companies that offer critical illness insurance also offer a more focused cancer-only plan. This may be a good choice for you if you have a high risk of cancer.
  • Bundle plans: Some insurance companies offer the option to combine a critical illness plan with other coverages like, disability or life insurance. Bundling like this makes sense if you want to bulk up on coverages and prefer to avoid paying all those bills for so many plans.