What Is Critical Illness Insurance?
Critical illness insurance will pay you a lump sum if you are diagnosed with certain illnesses or injuries. Examples of illnesses typically covered by critical illness insurance include heart attack, life-threatening cancer, loss of a limb, and Alzheimer's disease. Often, loss of sight, a major organ transplant, and paralysis are also covered. You can then use the cash benefit to offset the decreased income or increased expenses associated with your illness. The lump sum is tax-free.
Ironically, the need for critical illness insurance came about because people are living longer, even with serious diseases. But living a longer life also means people have more medical expenses that can deplete their health insurance and personal savings. Critical illness insurance helps pay for uncovered medical bills and household bills.
Why consider critical illness insurance?
Medical advances increase the chances that you will survive a serious illness that in the past may have killed you. But what are your chances of surviving financially, as well? Unfortunately, not good. Your illness or condition may last for years, but your savings account may not. It's likely that you will be unable to work while you're ill, so your income may decrease. In addition, your expenses may increase. You may have to pay medical deductibles and certain medical expenses out of pocket, pay for home health care and/or housekeeping, and buy equipment designed to make your life easier. The cash benefit you receive from a critical illness policy may help ensure that you have funds when you need them most.
How can you get critical illness insurance?
Critical illness insurance can be purchased as a stand-alone health policy, as part of a health insurance policy, or as a rider to a life insurance policy for an additional cost. Critical illness insurance associated with life insurance may be called critical illness life insurance (CILI). If it is purchased as part of a life insurance policy, benefits payable for a critical illness may reduce or eliminate the death benefit your survivors can receive and may terminate the policy.
Policy provisions may vary
The critical illness policy will specify the benefit face amount — the full cash benefit payable. The full benefit is payable upon diagnosis of certain conditions or illnesses. For instance, many policies pay 100% of the benefit face amount when a covered individual has a stroke, a heart attack, or kidney failure or is diagnosed with cancer after the policy has been in effect for a certain amount of time. The policy may also specify that only partial benefits are payable under other circumstances. For instance, some policies may pay 25% of the benefit face amount (e.g., $100,000) when you need to undergo a coronary artery bypass or when you are diagnosed with cancer before the policy has been in effect for a certain amount of time. You may also be able to buy a critical illness policy that will pay you full benefits up until age 65 and partial benefits thereafter.
Things to consider
If you are considering this type of insurance, it's vital that you understand exactly what is covered and what is not. The insurance will pay only if you contract the illnesses listed in the policy. Even then, further limitations will be defined in the policy. For example, what does the insurance company consider to be a life-threatening cancer? If you have a family history of a certain illness, will the policy exclude that illness? Are there pre-existing condition limitations? What are the age limitations? How much does it cost? Does the premium increase as you get older? When do you receive the lump sum? Is it really offering you more than your existing health plan? Finally, be aware that if you own one of these policies and never get sick, you won't get any money back.
The cost and availability of life and health insurance depend on factors such as age, health, and the type and amount of insurance purchased. Also, a physical examination may be required at the time of application.
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