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What Is Critical Illness Insurance and Do I Need It?

Healthy Lifestyle, Insurance| Views: 1887

Health insurance typically provides for limited coverage when it comes to being diagnosed with a major illness such as cancer, heart attack, stroke or coma.  Unfortunately, it doesn’t cover the less obvious cost such as the out-of-pocket and non-medical expenses (i.e. lost wages, mortgage, rehabilitation, travel expense, etc.) associated with being diagnosed and later recovering from a critical illness.

What is critical illness insurance?

Critical illness insurance is a type of supplemental insurance which pays a tax-free a lump sum cash payment if you are diagnosed with a critical illness such as cancer, heart attack, stroke or coma.

What is a critical illness?

The types of critical illnesses that are covered can vary depending on the provider however typically these illnesses are divided between fully covered conditions and partially covered conditions. The difference being whether the policy pays you a full lump sum cash benefit or just a portion of it.

Fully Covered Conditions:
Again depending on the provider the following conditions are usually fully covered.

  • Invasive Cancer
  • Heart Attack
  • Stroke
  • End-Stage Renal Failure
  • Major Human Organ Transplant
  • Major Third-Degree Burns
  • Coma
  • Paralysis
  • Advanced Alzheimer’s Disease
  • Amyotrophic Lateral Sclerosis (ALS)
  • Coronary Artery Bypass

Partially Covered Conditions
These conditions are not as common and a critical illness policy typically only pays a partial payment.

  • Cancer in Situ
  • Benign Brain Tumor
  • Coronary Artery Bypass
  • Angioplasty

What are the benefits of having critical illness insurance?

Along with being life threatening, there is a lot of economic insecurity that goes along with having a critical illness such as loss of income.  The good news is that there are many benefits of having critical illness insurance that can help ease the financial burden. One of the greatest benefits is that you are paid directly in cash (typically in a lump sum payment) upon diagnosis of a critical illness.

In other words upon diagnosis you are free to use the cash anyway you like.  This is different from a Health Savings Account (HSA) which does not pay for non-medical expenses.  You also need to plan up-front for how much you want to save in it and what you are planning to spend it on.  If you have a high deductible health plan, you still have to pay your deductible first before an HSA pays out.  Its also not be be confused with disability insurance which can take months to pay out as opposed to days with critical illness policy.  

Here are several situations in which a critical illness policy would provide a cash benefit for:

  • Medical treatments and procedures not covered by your health plan: Even the best health insurance doesn’t pay for every treatment and procedure.  This leaves you literally holding the bill for what is not covered no matter whether you have a public, private or employer-based health plan.  If you have a high deductible health plan such as a bronze metal plan it can be even worse since coverage is already limited.
  • Mortgage payments: health insurance will not pay for your mortgage while you are recovering however a critical illness policy would.
  • General bills: Bills such as car payments, rent, electric, cable and even your insurance premiums.
  • Medical travel: Travel expenses can pile up quickly for treatments that are not available locally.  This includes airplane, hotel room and board, meals and medical facility and other non-medical costs that your primary health insurance will not cover.
  • Experimental treatments:If you are considering an experimental treatment either in this country or another country your cash benefit amount can also be applied towards these kinds of procedures.
  • Income replacement: If you are in the unfortunate situation where you cannot work because you need to care for a spouse, the cash benefit can also be used towards replacing a spouse’s income while caring for a loved one.

Other benefits may include annual health screenings and a variety of tests to promote healthy living.

How do I know if i need critical illness insurance?

We created a critical illness insurance decision infographic for you to quickly see if critical insurance is a good fit or not. In general critical illness insurance is best used as part of a broader financial strategy to cover what your health insurance does not and to minimize your financial risks.  

Critical illness protection pays for not only out-of-pocket costs but also non-medical costs.  It can be a particularly good fit for those with a high deductible health plan since it can be used to directly pay for your deductible, copay and coinsurance in the event of a diagnosis of a covered condition.

How much cash does critical illness insurance pay?

This varies by provider however a typical coverage range is between $10,000 and $100,000.  There are some policies that pay up to $2,000,000 although the greater the coverage amount the greater the monthly premium.

How much does critical illness insurance cost?

Cost are typically paid either monthly or annually and can vary depending on several factors such as age, smoking status and coverage amount.  For example, a 30 year-old non-smoker would only pay about $6/mo. ($14/mo. for a 45 year-old) for up to $10,000 in coverage or about $29/mo. for up to $50,000 in coverage.  If you smoke be prepared to pay about 1.3X that amount.  To cover the entire family it would roughly cost almost twice this amount as an individual.  

Tips for buying critical illness insurance protection:

  • Consider critical illness insurance as a way to prevent dipping into your hard-earned savings in the event of an emergency.
  • If you do not have the savings to cover you or your family from the financial burden of a serious illness these policies can be an affordable way to cover the cost.
  • When deciding on how much insurance you need, think about what you would lose if you were unable to work due to illness.
  • Consider what financial commitments you would still have in the event of an illness, such as children or a mortgage.

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