How to Evaluate a Critical Illness Insurance Policy

Hero Images/Getty Images

Critical illness insurance can provide an extra measure of financial protection when you’re diagnosed with certain devastating medical conditions. Rather than paying for your medical care like comprehensive major medical insurance does, it pays you a lump-sum of cash. You can use the cash for anything you wish; it doesn’t have to be used for medical expenses.

Meant to be supplemental health insurance, it isn’t a substitute for comprehensive health insurance.

 However, it can help protect you from the financial impact of lost wages or high deductibles and copayments when you’re diagnosed with one of the covered critical illnesses.

If you’re considering buying one, you need to evaluate a critical illness insurance policy carefully first so you’ll understand exactly what you’re paying for and what you’ll get in return. It’s essential that you read the actual policy or policy terms before you buy a critical illness insurance policy. Here are some questions that will help you evaluate a critical illness insurance policy.

What Illnesses Are Covered?

Carefully read the list of covered illnesses keeping in mind your family and medical histories and any known risk factors. Try to choose a policy that covers the diseases you’re the most likely to develop.

Just as important as the list of covered illnesses, what illnesses are excluded from coverage? For example, some policies cover Alzheimer’s disease, but specifically exclude all other types of dementia.

To you, the distinction between Alzheimer’s disease and non-Alzheimer’s dementia may not be clear or relevant, especially if the symptoms and outcome are similar. However, to the insurer, the distinction is worth tens of thousands of dollars.

Many policies cover cancer, but some exclude certain types of cancer such as non-melanoma skin cancers and very early prostate cancer.

A policy might offer coverage for some types of lupus, but exclude coverage for other types.

Some U.S. insurers will not honor diagnoses made in foreign countries or will only honor them if the diagnosis is subsequently corroborated in the U.S. Some insurers won’t pay-out for covered surgeries if the surgery took place in a foreign country.

How Are Pre-Existing Illnesses Handled?

Does the policy exclude them totally? Does it offer coverage but only after a waiting period? If you have a pre-existing condition, it’s important to determine how this particular policy defines a pre-existing illness. Some define it as a condition you sought care for or were treated for in the three months before you applied for critical illness insurance. Some use a six-month look-back period. Others define it differently. State insurance law may dictate how pre-existing conditions are handled by your policy.

A guaranteed issue policy means the insurance company must offer a policy to anyone who applies; it can’t refuse to insure people who are at high risk. However, just because a policy is guaranteed issue doesn’t necessarily mean it doesn’t exclude pre-existing illnesses. Asking the sales agent or benefits representative, “Can I be turned down for this insurance?” will tell you whether or not the policy is guaranteed issue.

If the policy isn’t guaranteed issue, the insurer may want a health history to help it determine your statistical risk for developing one of the covered illnesses. Answer these questions honestly. Be aware that the insurer may have access to information on you from other sources such as the Medical Information Bureau. Lying on your application or leaving out relevant information is fraud and could result in your policy being voided.

Does the Benefit Decrease for Certain Illnesses?

For example, some critical illness insurance covers coronary artery bypass surgery, but only provides a percentage of the full benefit for it.

If you have a $50,000 critical illness policy that only pays a 25 percent benefit for bypass surgery, you’ll only get $12,500.

Likewise, a policy that covers cancer may only pay a percentage of the full benefit if you’re diagnosed with a cancer in situ. If a suspicious spot on your mammogram turns out to be ductal carcinoma in situ, you’ll only get a portion of the full benefit even though it surely seemed to you that you had breast cancer since you underwent a lumpectomy and radiation therapy.

Can You Collect the Benefit More Than Once?

How would this policy handle it if you were diagnosed with two separate covered illnesses? If you have a $50,000 critical illness policy and have both a heart attack and a stroke, do you get a total of $50,000 or $100,000? Policies differ on this. If your policy allows for payment of the benefit more than once, is there a waiting period after you collect the first benefit before you’re eligible to collect a second benefit?

Is There a Waiting Period for Coverage to Kick In?

Some critical illness insurance policies have a waiting period between the effective date of the policy and when your coverage kicks in. If your diagnosis happens during the waiting period, you won’t be paid.  

Here’s how this works: effective date + waiting period = date coverage begins. Let’s say the policy becomes effective on January 1 with a 30 day waiting period for coverage to begin. Although your policy is effective January 1, if you’re diagnosed with a critical illness on January 15th, you won’t get any money because you were diagnosed before the 30-day waiting period was over. If you’re diagnosed with a critical illness on February 1, you’ll get paid.

With some policies, if your diagnosis was made after your coverage kicked in but your symptoms started before your coverage kicked in, you won’t be paid.

What Must You Do to Get Paid?

The insurance company that sells you a critical illness insurance policy won’t just take your word that you’ve been diagnosed with a critical illness. It will want proof. Ask what, specifically, your insurer will require in order to pay a claim.

Ask how long you can expect to wait before your claim is paid and what the average time period is between filing of the initial claim and the claim being paid.

Is This a Good Insurance Company?

Check with the Better Business Bureau to see if this insurer has complaints and, if so, how many were resolved successfully. Check with your state’s Department of Insurance to make sure this insurer is licensed to sell insurance in your state. Some states’ Department of Insurance will also give information about an insurer’s complaint ratio.

Why Are You Buying Critical Illness Insurance?

Ask yourself why you’re considering critical illness insurance. If the answer is that you’re afraid your comprehensive health insurance isn’t adequate, consider putting your money toward better primary health insurance rather than spending money to put lipstick on a pig.

If you’re afraid an illness will leave you unable to meet your financial needs, support your family, and put food on the table, consider disability insurance that will replace a significant portion of your paycheck, paying benefits monthly.

If you’re afraid you’ll have trouble paying your health insurance deductible or copayments, consider starting an emergency savings account, participating in a workplace FSA, or starting an HSA if you have a qualified High Deductible Health Plan. While critical illness insurance will only pay if you get one of the few diseases covered, you can use your FSA, HSA, or emergency savings for medical expenses related to any medical problem, not just for one of the critical illnesses listed in your policy.

One caveat: unless you’ve been contributing to an HSA for a few years and have built up a balance, you’re unlikely to have as much in your HSA as you’d get from the pay-out of a critical illness insurance policy. Effectively limited by law, an FSA balance will almost certainly be lower than a critical illness policy pay-out would be.

Only you can evaluate your risks and decide where best to put your limited funds. If the best place for those funds turns out to be a critical illness policy, then do your research to choose a credible insurance company with a good reputation for handling claims and customer complaints quickly and fairly. Make sure you understand the limitations of the policy as well as the benefits.