Critical illness Insurance

What is Critical Illness Insurance?

If you’re lucky, you’ve probably never had to use critical illness insurance (sometimes called catastrophic illness insurance). Perhaps you’ve never even heard of it. But in the event of a big health emergency, such as cancer, a heart attack, or a stroke, critical illness insurance could be the only thing standing between you and financial ruin. Many people assume they’re fully protected with a standard health insurance plan, but the exorbitant costs of treating life-threatening illnesses are usually more than any plan will cover. Read on to learn more about critical illness insurance and whether it’s something you and your family should consider.


Critical Illness Insurance 101

As the average life expectancy in the United States continues to increase, insurance brokers are finding ways to make sure Americans can afford the privilege of getting older. Critical illness insurance was developed in 1996, as people realized that surviving a heart attack or stroke could leave a patient with insurmountable medical bills.1

“Even with excellent medical insurance, just one critical illness can be a tremendous financial burden. Critical illness insurance provides a benefit if you experience one or more of the following medical emergencies:

Because these illnesses require extensive medical care and treatment, their costs can outstrip a family’s medical insurance policy quickly. If you don’t have an emergency fund or health savings account (HSA), you’ll have an even harder time paying those bills out of pocket. 

Many people are now choosing high-deductible health plans, which can be something of a double-edged sword: Consumers benefit from relatively affordable monthly premiums but can find themselves in a real pinch if a serious illness strikes.

Critical illness insurance can pay for costs not covered by traditional insurance. The money can also be used for nonmedical costs related to the illness, including transportation, childcare, and so on. Typically, the insured will receive a lump sum to cover those costs. Coverage limits vary—you could be eligible for a few thousand dollars all the way up to $100,000, depending on your policy. Policy pricing is impacted by a number of factors, including the amount and extent of coverage, the sex, age, and health of the insured, and family medical history.

There are exceptions to critical illness insurance coverage. Some types of cancer may not be covered, while chronic illnesses are also frequently exempted. You may not be able to receive a payout if a disease comes back or if you suffer a second stroke or heart attack. Some coverage might end when the insured reaches a certain age. So, like any form of insurance, make sure to read the policy carefully. The last thing you want to worry about is your emergency plan.

Why It May Be Important

A big draw of critical illness insurance is that the money can be spent on a variety of things, such as:

Low Cost, Limited Coverage

Part of what makes these policies appealing is that they generally don’t cost much, especially when you get them through an employer. Some smaller plans run as little as $25 a month, which looks like a bargain compared to the cost of a typical, low-deductible health insurance policy. 

The more illnesses your plan covers, the more you’ll pay in premiums. A 45-year-old female with an individual, cancer-only plan may pay $40 a month for $25,000 of coverage. That same woman may pay twice that a month if she expanded the coverage to include coronary illnesses, organ transplants, and certain other conditions.

Seniors should be particularly careful about these policies. There may be limits for payout on some policies, with persons over a certain age (such as 75) ineligible for payment, or they may include so-called “age reduction schedules,” which means your potential insurance payout shrinks as you get older.

Alternatives to Critical Illness Insurance

There are alternative forms of coverage without all these restrictions. Disability insurance, for example, provides income when you can’t work for medical reasons, and financial protection isn’t limited to a narrow set of illnesses. This is an especially good option for anyone whose livelihood would take a significant hit from a prolonged work absence. Refer to our Disability Section for more information.

Consumers with a high-deductible plan can also make contributions to either a health savings account or flexible spending account (FSA), both of which offer tax benefits when used for qualified expenses.

You can also build a separate savings account to cover nonmedical outlays that could arise if you have cancer, for example, and have taken leave from your job.

How Do I Buy Critical Illness Insurance?

Critical illness insurance is a policy that pays a direct lump-sum benefit that you can spend to pay for expenses not covered by other insurance. You can purchase it yourself or maybe through your employer, or add it to your personal life insurance plan if your policy offers it..

What Does Critical Illness Insurance Provide for Assistance?

Critical illness insurance can help fund the bills that life-threatening illnesses like heart attack, stroke, or cancer can incur. At your discretion, the benefit from a critical illness policy can cover anything from medical expenses not covered by a healthcare policy to household bills for utilities, rent or mortgage payment, or grocery bills.

Which Critical Illnesses Qualify for This Insurance?

Coverage is usually limited to medical crises involving heart attack, stroke, renal failure, cancer, paralysis, and a few others. Each plan has a specific list, which varies from plan to plan.

The Bottom Line

Because medical bills are a common cause of bankruptcy in the United States, this type of policy may be worth taking the time to research. Critical illness insurance can alleviate some of the financial worry in the event that you become too sick to work. It provides some flexibility in that you can use the money paid out as you wish to cover a wide variety of potential needs. However, there are some drawbacks and stipulations to this type of insurance coverage. Even with a family history of a specific condition, you might find that other types of insurance would better meet your needs. As with all types of insurance, you should shop around to find the policy that best meets your needs and situation. Disability insurance might be a better choice because the benefits are more comprehensive, and they pay out for a longer time.


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