If you become seriously ill, your health insurance may cover only part of your treatment costs. Without a health savings account (HSA) or a significant emergency fund, your medical bills could quickly become overwhelming. That’s where critical illness insurance can offer essential support.
How Critical Illness Insurance Works
Critical illness insurance generally pays the policyholder a lump-sum cash payment if they are diagnosed with a covered illness. This payment is typically made directly to you and can range from a few thousand dollars up to $100,000, depending on your policy.
Commonly covered critical illnesses include:
- Cancer
- Heart conditions such as heart attack or bypass
- Organ transplant
- Stroke
The lump sum can be used for medical expenses as well as non-medical costs related to the illness, such as transportation, child care, or missed paychecks due to lost income.
Key Considerations Before Buying a Policy
Before purchasing critical illness insurance, it’s vital to discuss your options with your insurance adviser. Consider the following factors in the context of your specific situation.
Your Current Coverage and Savings
First, thoroughly review your existing health insurance. Identify your deductible and out-of-pocket maximum—these are the largest amounts you’d typically have to pay out-of-pocket if critically ill.
Next, assess your liquid savings, including your HSA and emergency fund. Do you have enough to cover those maximum costs? Also, check if you have short-term disability insurance to replace lost income during an illness. You may find your existing coverage and savings are already sufficient. However, many Americans don’t have enough saved to cover all the costs associated with a significant illness.
Your Risk for Critical Illness
Your personal risk for a critical illness—especially if you’re younger (in your 30s, 40s, or 50s)—may be lower than you imagine. Discuss your overall health and family history with your physician.
- Your physical exam results and family history can indicate your risk for heart disease, stroke, or cancer.
- Lifestyle factors, like smoking, can also significantly impact your risk.
If your actual risk for a covered critical illness is low, the insurance may not be a worthwhile investment. Conversely, if you are at high risk, critical illness insurance may be a valuable safety net.
The Cost of the Premium
Compared to traditional health insurance, initial critical illness insurance premiums may seem low (sometimes as little as $25 per month). However, you must be aware of how these premiums can change:
- Affordable Care Act (ACA) guidelines that protect traditional health insurance plans (e.g., covering pre-existing conditions, preventing premium hikes solely for aging or developing a chronic illness) do not apply to critical illness policies.
- Some policies can deny coverage for pre-existing conditions or significantly increase premiums as you get older, which is precisely when you are more likely to need the coverage.
- Adding coverage for more illnesses can also raise your premiums.
While premiums are likely low if you are young and healthy, these factors can lead to high costs over time, especially when compared to the total amount of coverage provided.
Policy Limitations
Critical illness insurance only covers a limited number of diagnoses, and the conditions for a payout can be strict:
- Coverage may require a diagnosis to occur in certain circumstances (e.g., a cancer diagnosis may only pay out if the cancer has spread).
- A payout may be denied if the patient’s condition improves quickly (e.g., neurological damage from a stroke improves within 30 days).
- Some policies require you to survive a certain amount of time after the illness strikes before the benefit is paid.
- Payouts may be reduced for people over age 75, when the need for coverage is often highest.
Ultimately, deciding whether to purchase critical illness insurance depends on your current coverage, savings, health, and lifestyle. For personalized advice, consult your trusted insurance adviser.