What Is Critical Illness Insurance, and Do You Need It?
Key takeaways:
Critical illness insurance offers you a lump-sum cash payment if you are diagnosed with a life-threatening condition like cancer. It also would pay if you suffer a serious health event, such as a heart attack or stroke.
It is supplemental insurance that you would buy in addition to health insurance. But first review the coverage in your health plan to see if you really need the extra protection.
Critical illness insurance excludes many chronic conditions. Make sure you understand exclusions and restrictions that may limit or prevent a payout.
You may know your health insurance covers you if you get sick or injured. But with rising out-of-pocket costs, you may be concerned that you aren’t covered enough. That’s when critical illness insurance might be helpful.
Critical illness insurance is a form of supplemental insurance that’s meant to complement a traditional health insurance plan. It only covers a small number of serious illnesses and conditions instead of a wide range of possible ailments. Then it pays you a lump-sum cash benefit if you're diagnosed with any of the eligible conditions.
Below, we break down how critical illness insurance works and explain its pros and cons.
Prescription Savings Are Just the Beginning
See what other benefits you qualify for—from cashback cards to cheaper insurance.
How does critical illness insurance work?
The idea behind critical illness insurance is that if you’re hit with a medical emergency or a life-threatening health condition, you may be unable to afford the costs of treatment and recovery — even with health insurance. You also may be unable to work and earn a living. A lump-sum benefit amount may give you the resources you’d need to heal.
You can buy critical illness insurance in the following ways:
From your employer, if it’s offered
From an insurance company
As a rider (add-on) to a life insurance policy
Critical illness insurance focuses on cash for recovery from several core conditions such as:
Heart attack
Life-threatening cancer
Organ transplants
Stroke
Coronary artery bypass graft surgery
Unlike a traditional health insurance plan, a critical illness insurance policy gives you cash to use on expenses such as out-of-pocket medical costs, your mortgage or rent payments, and child care. You pay a monthly premium and get a maximum lifetime benefit — typically a one-time payment if you qualify.
Read more like this
Explore these related articles, suggested for readers like you.
But it’s wise to consider if you really need critical illness insurance in the first place. Policies often don't cover common chronic conditions such as diabetes. Your health plan and disability insurance may provide all the coverage you need. Or, you may be better served by switching to a more comprehensive health plan when the time comes.
What types of conditions does critical illness insurance cover?
Every policy is different. But the more health conditions you add to coverage, the higher your monthly premium will be.
In addition to the five typical diagnoses, a more extensive policy may include:
Paralysis
Coma
Kidney failure
Alzheimer's disease
Major organ failure
Traumatic head injuries
Multiple sclerosis
Loss of sight
You may be wondering if critical illness insurance covers COVID-19. The short answer is that it depends. Insurers have been tweaking policies to address COVID-19, and there may be some scenarios in which you are covered. For instance, if you’re on a ventilator for a number of days, there may be a payout. Other policies specifically exclude COVID-19.
The pros and cons of critical illness insurance
Deciding whether to buy critical illness insurance involves weighing your current health and disability coverage with your financial needs and feelings about the future. Here are a few pros and cons to consider.
| Pros | Cons |
|---|---|
| Peace of mind knowing that if you get sick within a narrow range of conditions, you’ll have money coming in to offset the potential financial burden. | Many chronic medical conditions such as diabetes often aren’t covered. Your health plan may offer sufficient overall coverage — or could, if you decide to switch plans during open enrollment. |
| Premiums are often low, especially compared with health insurance. | Premiums typically rise over time. | Cash payout goes directly to you to spend however you like. | You may want to consider alternative supplemental insurance such as disability or accident insurance. Hospital indemnity insurance pays for costs related to a hospital stay, whether due to illness or injury. |
| Policies are often portable, so they’re not dependent on your job. | Policies can exclude preexisting conditions and impose age and other restrictions on the payout. There may be a waiting period. |
What are the premiums for critical illness insurance? Do they rise over time?
Premiums are low, at least compared with health insurance. But they usually rise as you age.
Critical illness insurance premiums often cost well under $100 a month, and may be as low as $25 a month. Liberty Mutual offers critical illness insurance premiums for as low as $12 a month — for a 35-year-old nonsmoking male in good health who would receive a $30,000 payout.
Your premiums depend on factors such as:
Your age
Your health
Whether you smoke
Where you live
The insurance company you use
A critical illness can be costly. A study from the American Cancer Society Cancer Action Network concluded that with more than 200 different types of cancer, there is no average cost that a patient can expect to pay.
Having health insurance is “critical” for people with cancer, the report said. The kind of insurance is “an important factor in how much they will pay out of pocket." Those with large employer health plans tend to pay the least for their medical bills, compared to patients with small-employer, high-deductible health plans or those with individual marketplace plans.
How do you choose a coverage amount?
There are two factors you’ll want to consider:
Your monthly expenses
How long the cash benefit should last
Some experts suggest that your critical illness policy cash benefit should last at least 5 years. Those experts often work at insurance companies, which have a self interest in selling critical illness insurance, but it’s hard to argue with their assessment. For instance, the average out-of-pocket costs for medical services and prescription drugs among Medicare enrollees age 65 and older who received a cancer diagnosis were $2,200 and $243, respectively. That’s just in the first year of their diagnosis.
So, ideally, you’d want a payout to give you as much time to recover as possible.
What can you use a critical illness insurance payout for?
Really, anything. Check with your policy, but generally, the money is there for you to use however you want.
How is critical illness insurance different from catastrophic health insurance?
The two types may sound similar, but they’re different. If you have critical illness insurance, you hopefully also have comprehensive health insurance. Catastrophic health insurance is minimal health insurance at a low monthly cost. It’s only offered to people who are age 30 and younger, or to those who have qualified for a financial hardship exemption because they can’t afford regular health insurance.
With catastrophic health insurance offered through the Affordable Care Act (ACA) marketplaces, you’ll have low monthly premiums but a very high deductible. In 2022, you’ll have a $8,700 deductible for an individual.
Like critical illness insurance, catastrophic health insurance protects you in a worst-case health situation, such as a heart attack or cancer. It often will pay for a trip to the emergency room, but only after you meet the deductible.
ACA catastrophic health plans cover most preventive care like vaccines at 100%. But the main difference is if you have catastrophic health insurance, it’s not a regular health plan because of the very high deductible and limited eligibility. People who have a critical illness insurance policy, do, or should, have regular health insurance as well.
How do pre-existing conditions affect critical illness insurance policies and claims?
As a general rule, critical illness insurance policies don’t cover pre-existing conditions.
It’s against the law for health insurers to charge more or refuse to cover you for pre-existing conditions — when it comes to a standard health insurance policy. But for a supplemental policy such as critical illness insurance, the rules are different. For instance, if you are in remission for a certain type of cancer, you often won’t be covered for that cancer if it returns.
If another unconnected health emergency were to develop, you would be covered as long as it is included in the policy.
Another difference: You may need to take a medical exam before getting an offer of critical illness insurance. But this isn’t always the case. For example, MetLife doesn’t require you to get a medical exam if your employer offers critical illness insurance and you’re actively working. Mutual insurance organization Assurity says medical exams are unnecessary for “the most common coverage amounts.”
What is a reduction schedule?
Some critical illness insurance policies have reduction schedules. That is when the payout is reduced or eliminated after a certain amount of time. A reduction schedule is often tied to your age. That can mean you won’t be covered for a certain illness if you’re over a certain age. Generally, that is around age 70 or 75.
Or, it’s possible that you may be covered but your lump-sum payout will be reduced, often by 50%, usually around your 65th birthday.
Insurance companies know that the likelihood for certain illnesses and conditions go up as you age. Insurers are in a for-profit business, and if an insurer knows that you will probably become sick, there’s little profit in offering a product that you will definitely use.
So study your policy carefully and ask about exclusions. For instance, you may be covered for a stroke but not a transient ischemic attack (TIA). Sometimes called a mini stroke, a TIA isn’t as damaging as a stroke.
You may be fine with the exclusions. But you want to know what those exclusions are before you sign up for a critical illness insurance policy and expect a hefty lump-sum payout the moment you find yourself in an unnerving health situation.
Is the lump-sum payout from critical illness insurance taxable?
Payouts can be taxable, if you or your employer paid premiums on a pretax basis, according to Symetra, a life insurance company. But you may want to consult a tax professional because tax liability depends on your individual situation.
The bottom line
If you’re worried about someday being gravely ill and unable to afford the costs of a life-threatening condition, critical illness insurance may be a good supplemental policy that allows you peace of mind. You’ll want to consider it with a critical eye, though, because it often excludes a lot of common health conditions. Check the policy’s terms and conditions, and ask about limits on the payout. It’s a good idea to examine your traditional health insurance plan and disability insurance first to review the coverage you already have.
Why trust our experts?
DISCLAIMER: This article is solely for informational purposes. This article is not professional advice concerning insurance, financial, accounting, tax, or legal matters. All content herein is provided “as is” without any representations or warranties, express or implied. Always consult an appropriate professional when you have specific questions about any insurance, financial, or legal matter.
References
American Cancer Society Cancer Action Network. (2020). The costs of cancer.
Anderman, T. (2016). Critical illness insurance might not be worth it. Consumer Reports.
Anthem. (n.d.). What is critical illness insurance?
Assurity. (n.d.). Critical illness insurance.
Bernard, T. S. (2016). Insurance for critical illness may add security, but at a cost. The New York Times.
Cigna. (2018). What is catastrophic health insurance?
HFC Insurance. (n.d.). Critical illness coverage steps in when you need it most.
Inserro, A. (2021). Highest cancer care cost burden happens at 2 time points in Medicare, report says. The American Journal of Managed Care.
Liberty Mutual Insurance. (n.d.). Critical illness insurance.
Life Insurance Marketing and Research Association. (2018). What do employees know about critical illness insurance?
Medical Mutual. (n.d.). Accident and critical illness insurance plans.
MetLife. (n.d.). Critical illness insurance.
Prudential. (n.d.). 4 considerations when buying a critical illness plan.
Sammer, J. (2020). A new role for critical-illness insurance in the coronavirus era. Society for Human Resource Management.
Shih, A. (2021). Do I need critical illness insurance? Policygenius.
Symetra. (2021). Is my critical illness insurance payout taxable?
Wolstenholm, J. (2021). How does critical illness insurance work? [Compared to other types of insurance]. Breeze.
