Your Guide to Understanding Critical Illness Insurance

Critical illness insurance provides coverage over and beyond what your health insurance policy covers. Do you need it?

Critical illnesses can strike anyone, at any time. Critical illness insurance helps you deal with the unexpected costs of these health problems. According to estimates by the American Heart Association, this year alone 600,000 Americans will experience their first stroke, 785,000 Americans will have a heart attack for the first time and about 1.4 million will be diagnosed with cancer.

Not everyone is prepared for the financial burden that comes with surviving a critical illness. Medical problems were the leading cause of bankruptcies in America in 2008, accounting for 60 percent of all bankruptcies. The deductibles and co-payments from your health insurance policies can cost $5,000 a year or more. If you have an individual Marketplace plan for 2016, you can pay as much as $6,850 for an individual plan and $13,700 for a family in deductibles and copayments. These expenses will come out of your pocket; critical illness can help pay them.

What Is Critical Illness Insurance?

For a critical illness policy to pay benefits, you must be diagnosed with a covered illness. Every policy varies, but covered illnesses may include cancer, heart diseases, major burns, major organ transplant, renal failure and the like. Cancer alone accounts for about two-thirds of critical illness claims, followed by heart attack, stroke and multiple sclerosis.

Critical illness insurance differs from a major medical policy. Major medical plans cover treatments you need for all injuries or illnesses, unless specifically excluded by policy language. They also provide as much coverage as you need, until you reach the policy limit. Your healthcare providers will submit invoices to your insurer, which will pay bills as they are incurred.

Critical illnesses are indemnity policies, which means they pay benefits according to a schedule. To receive benefits, your policy must specifically list your illness as a covered condition. When you receive a diagnosis of a covered illness, your critical illness policy will pay the specified benefit. Traditionally, critical illness policies paid claims in one lump sum, but some insurers have policies that will pay expenses as you incur them. The policy will also pay the benefit directly to you, rather than to your medical providers.

You will receive critical illness benefits on a tax-free basis if you pay the policy premiums, rather than an employer. Best of all, you can use your benefits any way you like! This enables you to pay uncovered medical expenses such as deductibles, copayments or experimental treatments; hire home health aides or people to help you with chores you can no longer do; pay down your mortgage…any expense you want.

Identify Your Needs

Although the majority of employers offer some form of life insurance, not as many offer critical illness insurance. Check your benefits package—if you do not have coverage, please contact us. You can buy critical illness insurance on an individual basis. Critical illness insurance can be quite complex; we can help you evaluate policies for benefits and value.

Keeping it in Your Budget

What does critical illness insurance cost? That depends on your overall health, age and family medical history. The least expensive policies cover only a few illnesses—for example, a cancer policy (a form of critical illness coverage) covers only cancer. If you have a heart attack, you’d be out of luck in more ways than one.

Premium rates vary from insurer to insurer. When pricing your policy, the insurer will consider your age, health status, smoking habits and geographic location. Generally, your rates will be guaranteed for a period of time (such as three to five years). After that period, an insurer can apply to the state insurance department for a rate increase for an entire block of policies (not policies on an individual basis). It must prove to the state’s insurance regulators that the rate increase is necessary—for example, it received more claims than expected.

Forms of Critical Illness Insurance

You can choose:

• Simplified issue plans: You can obtain up to $50,000 in coverage by filling in a simple application that includes only a few health-related questions.
• Underwritten plans: These plans provide higher benefits, up to $500,000. You’ll have to provide medical information on the application.
• Life insurance with critical illness benefits: Some life insurance policies offer a critical illness benefit. You can buy this additional coverage in a rider, which becomes part of the contract.