Critical illness insurance: A financial lifeline
Ruth E. Thaler-Carter
If you end up in the hospital with a serious illness, the costs can be daunting. Health insurance will pick up some of the bills for surgery, treatment, recovery and necessary medications. But what about out-of-pocket costs like deductibles? What about your mortgage payments and child care costs? What about lost wages while you’re in the hospital?
A product called critical illness insurance provides financial support to individuals diagnosed with major illnesses. It pays a lump sum of cash immediately upon diagnosis, according to Jesse Slome, executive director of the American Association for Critical Illness Insurance.
This one-time payment, which is tax-free, can be used in any way the patient needs or wants. If the amount turns out to be more than needed for paying bills, the remainder can be saved or even used for “a celebratory vacation trip,” Slome Says. “You can keep it all.”
|Benefits for critical illness insurance policies generally range from $5,000 to as much as $1 million.|
Why was critical illness insurance created?
According to Slome, critical illness insurance is relatively new in the United States, but has been quite common for years in other countries, including Canada and most European nations. It evolved from the heart transplant work of Dr. Christiaan Barnard, a South African surgeon whose brother, Marius, saw that patients were healing but going bankrupt.
The No. 1 cause of bankruptcy, according to Slome, is medical bills — even though about 70 percent of those who claim bankruptcy have health insurance.
“You can lose income, but the bills don’t stop,” Slome says.
According to MetLife’s 2010 Financial Impact of a Critical Illness Study, deductibles, co-pays, uncovered prescription drugs and other out-of-pocket costs can reach more than $6,500 for a typical family. Moreover, 60 percent of people with serious medical conditions continue to incur these out-of-pocket expenses for as long as three to five years after their diagnoses.
Slome says critical illness coverage often is sold with home mortgages.
“Your chance of dying before paying off the mortgage is small, but the chance of having a critical illness (while paying a mortgage) is enormous,” Slome says.
What does it cover?
Critical illness coverage can come in handy for expenses like:
• Going outside your policy’s coverage network for treatments, medications and procedures not covered by traditional health insurance.
• Replacing income lost during treatment and recovery.
• Paying for treatment-related travel expenses and accommodations.
Critical illness insurance “lets you focus on your recovery, rather than financial stress,” Slome says.
Transplants are among the health issues that would qualify for coverage, as are severe burns, paralysis, heart attacks, kidney failure and stroke, according to the American Association for Critical Illness Insurance. Your policy might have exclusions when it comes to pre-existing conditions. For example, your policy may exclude any conditions diagnosed in the year before it goes into effect. Or it might have a waiting period after the policy goes into effect, during which any expenses related to a pre-existing condition will not be covered.
Some policies have what are called survival periods. A survival period is the number of days you must remain alive after the illness is diagnosed, according to the American Association for Critical Illness Insurance. If you die during the survival period, your estate may receive a refund of all the premiums you paid — but not the policy’s full benefit.
Who should buy it?
This type of coverage is most appropriate for people in their late 30s and early 40s, Slome says.
This coverage could be ideal for non-working spouses, as well as for people in high-risk occupations who don’t qualify for disability insurance (like active military members, firefighters and police officers), according to Ben Coleman, business development manager with Disability Insurance Services in San Diego.
What makes it different from the rest?
Critical illness coverage dovetails with — but doesn’t replace — disability insurance, according to Coleman. Both types of insurance are intended to financially support people following an illness or injury.
Perhaps the biggest difference between disability insurance and critical illness insurance is that disability covers injuries and illnesses, while critical illness insurance covers illnesses only, Coleman says. And while critical illness insurance provides a one-time, lump-sum payment, disability insurance usually provides monthly payments for an extended period of time.
“Disability insurance is for protecting your paycheck, while critical care insurance is for protecting your assets,” Coleman says.
How much does it cost?
The cost of critical illness coverage is based on what Slome refers to as a handful of “moving points,” including:
• How much money someone wants to receive.
• Whether the insured person is a smoker or non-smoker.
• Existing health conditions.
• Height and weight.
According to the American Association for Critical Illness Insurance, a 40-year-old man who doesn’t smoke could expect to pay between $180 and $220 a year for coverage. A 40-year-old woman who doesn’t smoke could expect to pay slightly less — $145 to $185 a year.
Providers of critical illness coverage include MetLife, Aflac, American General Life and Accident Insurance, Assurity Life Insurance and Mutual of Omaha.
Benefits for critical illness policies generally range from $5,000 to as much as $1 million, according to the American Association for Critical Illness Insurance, but most range from $10,000 to $50,000.