Critical Illness Insurance

“What is critical illness insurance?”

This is one of the most misunderstood forms of family protection insurance but one that has received increasing attention since the advent of the Affordable Care Act. As deductibles and co-pays have increased more and more individuals have looked at this option as a way to reduce their exposure in the event of a significant illness.

Health-care costs have risen faster than inflation, and to cope employers have been requiring workers to foot more of the bill for their care. The total employee share of health-care costs, including premiums and out-of-pocket costs, has climbed to almost 37% from about 34% in 2011, according to a recently conducted survey by Towers Watson and the National Business Group on Health, a membership group that advises large employers on benefits. This means that for every $1,000 in total health care expenses in 2013, employees pay $369 for premiums and out-of-pocket costs. The report projected that the average employee premium contribution for 2013 would be $2,888, up 8.7% from last year. (1)

Two thirds of all bankruptcies are a direct result of medical expenses, but that is not because families did not have insurance. Of those who filed bankruptcy, a widely syndicated 2008 Harvard study reported that 78% did in fact have coverage at the time of the illness, but their policies had high deductibles and did not cover the incidental expenses that arise with a serious illness.

Critical illnesses are striking more Americans every single year. The American Cancer Society reports that some 1.4 million Americans are diagnosed with cancer annually. Roughly 785,000 Americans will have a first heart attack this year, and 600,000 will experience their first stroke according to the American Heart Association. Thankfully, most of these attacks will not ultimately prove lethal.

According to the Harvard study, many health insurees realized themselves to be under-insured and therefore suddenly accountable for thousands in various out-of-pocket expenses. For medically bankrupt families, the average of these costs was about $17,749. Because most health insurance is linked to employment, a medical event can trigger loss of coverage. The costs were generally even worse for families in these situations, as their expenses averaged $22,568. (2)

CI originated in the medical field with South African surgeon Marius Bernard. Dr Barnard was part of the surgical team assembled by his brother Christiaan Barnard for the first human to human heart transplant.

Marius Barnard realized that while his medical procedures were saving and prolonging lives, the accompanying cost was so significant that it was impacting the quality of life after the fact.

Certain that a solution could be found, he worked with South African insurance carriers to design the first critical illness coverage, which was launched in August of 1983. Carriers followed suit in the United States in the late 1990s.

Its purpose is to pay out a lump sum of money on the diagnosis of specified illnesses noted in the policy. It is referred to as “critical illness” because of the nature of certain types of diagnoses.

Among conditions covered by Critical Illness Insurance:

  • Alzheimer’s Disease
  • ALS
  • Blindness
  • Brain Tumor
  • Cancer
  • Coma
  • Coronary Artery Bypass
  • Diabetes
  • Heart Attack
  • HIV/AIDs
  • Kidney Failure
  • Major Organ Transplant
  • Multiple Sclerosis
  • Paralysis
  • Parkinson’s Disease
  • Stroke

Although all of above are covered by traditional health insurance, there is no coverage for the substantial incidental expenses caused by these conditions. There are no limitations placed on the lump sum payment triggered by a covered illness, which means it can be utilized to help bridge the gap between medical insurance and ongoing and/or additional expenses caused by the illness. For example, the money can be used for:

  • Medical co-pays and deductibles.
  • Treatment not covered by a health plan.
  • Expense replacement for a spouse functioning as a caregiver.
  • Prescription drug co-pays.
  • Durable medical equipment like a hospital bed.
  • Expenses associated with reconfiguring your house for handicap access.
  • Travel expenses for family members to visit.
  • Mortgage and rent payments.
  • Utility payments and other household bills.

The benefits available range from a few thousand to a million dollars or more. Some policies allow for more than one payment to be made for multiple illnesses. Best of all, after providing proof of the illness, there is no requirement to provide receipts.

Is it better to buy direct or from an agent?

Although the concept of payment is simple—you get a lump sum when you trigger the policy— how you trigger the policy and what you get, is not. For instance, how you trigger the policy, what type of documentation you need and what amounts you get, are different for each carrier. Other issues should be taken into consideration as well, including:

  • Is coverage necessary if you have disability income or Social Security disability income?
  • Is coverage necessary if you have long-term care insurance?
  • How much should I get?

For these reasons it makes sense to work with an agent who has expertise in the product.

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