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Critical Illness Insurance – What It Is and Why It's Important

By  Kerry Martin Kerry Martin  on 2016-01-27 15:16:46  |  Featured in  Insurance
Kerry Martin
Posted By Kerry Martin
in Insurance
on 2016-01-27 15:16:46

critical.illness.insurance.2016.jpgWith health insurance costs increasing - see 7 Escalating Health Care Trends to Monitor in 2016 many companies are thinking of ways to help mitigate the costs for consumers. One type of insurance coverage that is seeing an increase in popularity is Critical Illness Insurance.

Critical Illness (CI) plans are a relatively new phenomenon - the first policy was written in United States in the 1990’s. Currently, about 1 million Americans are covered by a Critical Illness insurance policy. With more and more employers offering this type of supplemental coverage, enrollment continues to grow each year.

Like most other types of insurance, however, many feel that Critical Illness adds additional complexity to the already confusing maze of health care. Here are some details that can help you stay informed.

What is critical illness insurance?

critical.illness.insurance.jpgCritical illness is intended to supplement, not replace, major medical insurance.  Critical Illness is designed to provide coverage for certain costly ailments by paying a lump-sum benefit if the policy-holder is diagnosed any of the predefined covered illnesses.  

Critical Illness plans typically cover major diseases such as cancer, heart attacks, and stroke. Depending on the particular insurance, Critical Illness policies may also cover other conditions like kidney failure, multiple sclerosis, bypass surgery, angioplasty, Alzheimer’s disease, major organ transplants, blindness, and deafness.

Premiums are based on your age and health when you enroll.  For example, according to the American Association for Critical Illness Insurance, in order to receive a $30,000 lump-sum benefit, a 45-year-old woman, non-smoker could expect to pay $420 to $460 per year and a 55-year-old man, smoker could expect to pay $1,495 to $1,530 per year.   Coverage options vary considerably. You can buy as little as $5,000 in coverage to as much as $1 million! However, the higher the lump sum payout, the more you will have to pay in premiums.

Why is this important?

About 64 million Americans struggled to pay medical bills in 2014 (more than half of whom actually had health insurance), according to a survey conducted by the Commonwealth Fund.  While the survey shows a decline in the number of people who reported medical-related financial difficulties, some  worry that the popularity of high-deductible health plans, plans which have lower premiums and higher deductibles, could make this number increase again in the future.

According to the Kaiser Family Foundation’s 2015 annual survey of employer sponsored coverage, 46% of workers covered by insurance had to pay a deductible of at least $1,000 (up from 22 percent in 2009). This means that an individual would have to pay $1000 out of their own pocket before the insurance company would begin to pick up some of the tab, referred to as coinsurance.  

Another factor to consider is out-of-pocket maximums, which for health insurance plans sold through its Marketplace, can be as high as $6,600 per individual and $13,200 per family.  While intended to limit the amount of money any individual or family pays in health care costs during the plan year, having to pay to $6,600 can overwhelming as many people do not have this amount of money at their disposable. Compounding this financial burden even more is the fact that the sickest individuals are often unable to work and are not bringing home the money to which they are accustomed.

As such, Critical Illness plans are designed to help individuals pay for medical expenses, like these deductibles and out of pocket maximums, as well as non-medical costs such as child care, rent/mortgage and transportation.  

Is critical illness insurance right for you?

In uncertain times, Critical Illness plans are intended to provide financial certainty to individuals and allow them to focus on their health so they can get better faster. It’s like a  financial safety net for unexpected medical expenses.

As with all things related to health care, however, it is important to understand the ins and outs of the policy before you decide if it is right for you.

For example, what happens if you end up getting injured or diagnosed with a condition not on the policy’s list (i.e. you break a leg or get diagnosed with fibromyalgia, a condition not covered by the your Plan).  Essentially, if you are diagnosed with an illness that is not on the policy list, your claim may be denied which means  you would still have to pay your premiums and have to pay for expenses related to the uncovered illness or accident.

Additionally, you should review the policy for what is referred to as the survival period. Most Critical Illness policies have a waiting period, also known as a survival period, which refers to the period of time you must wait to collect the lump sum benefit. This period can vary from one policy to another, but begins after you’ve been diagnosed with an illness.

A traditional cost-benefit analysis may help you decide if this type of coverage is right for you. It is important to weigh the monthly cost versus the potential payout.

Here are a few things to consider:

  • How much is the premium each month based on your age and health?
  • Do you have any pre-existing conditions that would disqualify you from coverage?
  • How healthy are you?
  • How heavily do you rely on your salary?
  • What other financial commitments do you have – mortgage / rent utilities, student loans, child care expenses, etc.?
  • Do you have any other insurance (i.e. life insurance) which may cover you in the case of a serious illness?
  • Does your employer offer any benefits / income replacement if you are unable to work because of an illness or disability?
  • Do you have any other savings you can use instead of purchasing Critical Illness insurance?

How do I find out more?

Some companies are offering Critical Illness insurance as a voluntary benefit especially if they offer High Deductible Health Plans. If your employer has not yet started to offer this type of voluntary coverage or you are not working, you can go online and check out various offerings, just like you do when signing up for insurance through the Marketplace.

You can also consider other options such as life and disability insurance. Keep in mind that these options also require research and educating yourself about the potential risks and benefits. Talking to a financial advisor is highly recommended to find out what option(s) is right for you. For many, insuring ourselves, like we do our home, phones and cars, is a new phenomenon - something that is complex and to be researched thoroughly before any decision is made.

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Kerry Martin

Kerry Martin

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Kerry Martin is a Senior Business Analyst for Paragon Solutions focused on the healthcare payer space and Enterprise Content Management. Her career has been concentrated in healthcare and social services, most recently with a healthcare concierge company analyzing the benefit offerings of several Fortune 500 companies. Kerry’s deep understanding of medical, dental and other voluntary benefits enables her to deliver valuable insights about benefits optimization by recommending improved product offerings, operational design and consumer driven marketing strategies using proven analysis and an understanding of healthcare reform and mandates. Kerry holds a Bachelor’s Degree from the University of Delaware and a Master’s Degree from the University of Pennsylvania.

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