What Is Critical Illness Insurance and How Does It Work?

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Critical illness pays you cash, but only if you get the right illness. Image © Glow Wellness/Getty Images

Critical illness insurance sounds like it covers admission to a hospital intensive care unit, but it doesn't. Instead, it’s a type of supplemental health insurance that gives you money if you’re diagnosed with certain medical conditions.

Rather than paying you small amounts of money each month like disability insurance does, critical illness insurance pays its benefit all at once in a lump sum—but only if and when you're diagnosed with one of a few specific illnesses covered by the policy.

If you get a disease not covered by the policy, you get nothing from your critical illness insurance.

Which medical conditions qualify as a critical illness? It depends on your policy. Most policies cover:

  • Cancer
  • Heart attack
  • Stroke

However, some plans also cover one or more of the following diagnoses:

The only way to know which illnesses any particular critical illness insurance policy covers is to read the policy.

Critical illness insurance isn’t a substitute for comprehensive major-medical health insurance like the group health insurance you get through your employer, Obamacare, or Medicare.  Neither is it a substitute for disability insurance. Instead, it’s meant as an add-on to augment your regular health and disability insurance policies.

How Does Critical Illness Insurance Work?

Unlike comprehensive health insurance, critical illness insurance doesn’t actually pay for medical treatment. Instead, when you’re diagnosed with one of the covered diseases, it gives you a set amount of cash. It’s a type of fixed indemnity policy. Fixed means the amount of cash the policy pays is set by the policy itself; it won’t vary by how much your treatment costs or how much your doctor bills are.

How much does critical illness insurance pay? You can buy critical illness coverage that pays benefits as low as $10,000 or as high as $1,000,000. However, policies commonly available as a job-related benefit tend to pay $100,000 or less. If you’re able to choose a higher amount of coverage, you may face stricter underwriting if you choose a benefit amount over a certain threshold. That threshold varies from insurer to insurer.

If you’re diagnosed with a critical illness, you can use the cash benefit of your critical illness insurance however you’d like. Many people use the benefit to compensate for lost wages if they’ve been unable to work. Others use it to pay the cost-sharing expenses associated with their comprehensive health insurance such as their deductible, coinsurance, or copays. However, if you want to use the money to pay off credit card debt, buy a car, or take a family vacation, you can do that too. The choice is yours.

If you’re not diagnosed with a critical illness while you’re covered by a critical illness insurance policy, you won’t get any money back from your critical illness insurer.

Even if you’re diagnosed with another devastating or expensive disease, you won’t get a pay-out from your critical illness insurance if your disease isn’t on its coverage list.

How Do You Get Critical Illness Insurance?

In many cases, it’s offered as a voluntary benefit through your job. This means you can opt out of it if you’re not interested, or sign up for it during your workplace open enrollment and get a discounted group price. Your premiums will usually be deducted from your paycheck.

You may also buy critical illness insurance directly from an insurance company or using the help of an insurance broker. In this case, you won’t get the discounted group rates and your premium payments won’t be subtracted from your paycheck. However, you’ll have more coverage options to choose from.

Things to Know About Critical Illness Insurance

Since critical illness insurance isn’t comprehensive health insurance and doesn’t provide coverage for all of the essential health benefits, it won’t satisfy the Affordable Care Act’s requirement to have health insurance. By itself, critical illness insurance won’t help you avoid the tax penalty for being uninsured.

In the United States, critical illness insurance isn’t as tightly regulated as comprehensive health insurance. Therefore, you may not have the same consumer protections you’re used to with comprehensive health insurance.

For example, comprehensive health plans sold on Affordable Care Act health insurance exchanges must spend 80-85% of the money they collect as premiums on paying for health care or quality assurance activities. This only leaves 15-20% of the money collected as premiums for overhead, advertising, and profits. Since critical illness insurance isn’t held to this same standard, a much larger percentage of your premiums may go towards agent commissions, advertising, and profits.

Thinking of buying a critical illness insurance policy? Before you do, you need to understand some of the “gotcha” clauses so you’ll fully understand the coverage you’re considering. Learn more in:

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