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Critical illness insurance: Smart buy or ripoff?

Should you invest in critical illness insurance?

Don't be surprised if your employer soon begins offering critical illness insurance, an insurance policy that pays a lump sum if you are diagnosed with cancer or other serious illnesses. The number of companies providing this form of insurance to their workers is growing quickly, with nearly half of all employers with 500 or more workers now offering this coverage.

But is this a type of insurance in which you should invest? Do you need this extra protection even if you already have traditional health insurance? 

That's complicated. Some financial experts say that critical illness coverage has too many holes, with the coverage provided by it triggered only under very specific requirements. They say that even some forms of cancer aren’t covered under some policies. Others say that there are better ways for consumers to save funds to help cover the extra expenses associated with serious medical conditions.

See also: 5 questions to ask about long-term care insurance

But supporters argue that critical illness insurance can provide a financial safety net to consumers who are undisciplined when it comes to saving money. Other proponents say that major medical insurance, even strong policies, can't cover all of the unexpected costs that come with fighting off cancer or other serious illnesses.

"My opinion is that everyone should have some critical illness insurance unless you are just super-crazy wealthy and can write a check for just about anything you want," said Joe Graves, founder of I Hate Buying Insurance in Nashville. "Critical illness definitely helps with the costs associated with a severe health impairment."

What critical illness insurance does

Critical illness insurance policies pay out a lump sum when policyholders are diagnosed with serious illnesses such as cancer, stroke, kidney failure or a heart attack, though specific illnesses vary according to policy. Policyholders can use this lump-sum payment to help pay medical expenses, cover day-to-day living expenses or pay their monthly mortgage bill. There are no stipulations in how consumers can use the payment they receive from this insurance.

Critical illness policies are usually affordable. The American Association of Critical Illness Insurance says that it typically costs a 55-year-old non-smoker male from $880 to $915 a year for a policy that pays out a lump-sum cash benefit of $30,000. A 40-year-old female non-smoker would pay from $325 to $385 a year for the same protection, while a 45-year-old female tobacco user would pay $710 to $750 a year for that $30,000 benefit.

This type of insurance is becoming more common. According to benefits consultant Mercer, 45 percent of employers that had 500 or more workers offered critical illness insurance in 2015. That's a big jump from the 34 percent of such employers doing the same in 2009.

This growth is rather impressive. The American Association for Critical Illness Insurance says that the first critical illness policy was sold in 1996. Today, the association says, more than 1 million U.S. residents have a critical illness policy.

The number of employers offering this insurance is key to its growth. According to Gen Re's 2015 survey of the critical illness insurance market, nine out of 10 critical illness policies today are sold from employers to their employees. According to the same survey, critical illness policies provided by employers pay out an average of $15,000 when their benefits are triggered. Critical illness insurance plans pay out an average of $31,000 to consumers who purchase them on an individual basis and not through their employers, according to the survey.

The downside of critical illness insurance

Not everyone, though, says that these policies are a good investment.

"I've shepherded clients from cradle to grave, including through long-term care," said Gary Duell, president and chief executive officer of Happy Valley, Oregon's Duell Wealth Preservation. "I think critical illness insurance is a rip-off."

One problem? This insurance might not provide as much protection as policyholders think. Critical illness coverage doesn’t cover chronic, long-term health issues such as some forms of diabetes. The policies also typically only pay out once, after you’ve received a diagnosis for specific serious illnesses.

Consumers need to take a close look at their policies to see exactly what illnesses are covered. They might be surprised by which ones aren’t.

For instance, not all forms of cancer are always covered by critical illness insurance. Gen Re's survey says that prostrate or breast cancers that are non-invasive might be excluded from some critical illness policies. Other plans might still pay out for non-invasive cancers, but will make lesser payments for these illnesses.

Other financial pros say that critical illness insurance isn’t necessary for consumers who are disciplined when it comes to saving. Those consumers who build large emergency funds can cover the same costs that critical illness insurance handles, and won’t have to wait for specific triggers to access those dollars. Others can invest in health savings accounts on their own to cover the medical costs associated with serious illnesses.

Michael Kuhn, president of Fishers, Indiana-based GLG America, a company that specializes in workplace benefits, says that critical illness insurance can provide important financial help to consumers diagnosed with serious illnesses. But he also said that this insurance alone won’t provide all the financial protection that consumers need.

That’s because this insurance won’t help consumers who are struggling financially to deal with an illness that while not life-threatening still keeps them from working or still brings with it large monthly bills.

"Critical illness insurance helps employees meet their deductibles in the event of a critical illness like a heart attack, cancer or stroke," Kuhn said. "But on the downside, it doesn't go far enough to help employees in case of non-critical illnesses that still deplete people's resources."

Critical illness insurance has limitations, but ...

Proponents of critical illness insurance, though, say that this type of protection, even with its limitations, can be invaluable to policyholders.

Graves says that policyholders can use the coverage to pay for travel expenses to visit the best doctors. They can use their payment to cover the costs of purchasing in-home medical equipment or use the dollars to pay for child care while they are receiving treatment.

Graves recommends that consumers purchase both disability insurance and a critical illness policy. These two forms of protection will work together to cover any holes in consumers' major medical policies, he said.

"Don't just view critical illness as an alternative to disability," Graves said. "It should be assessed for what it does on its own or as a complement to disability."

See also: Health care cost rising: How to get smart about paying for insurance

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