What Is Critical Illness Insurance And How Does It Work?

Shawn Plummer

CEO, The Annuity Expert

If you’ve ever been seriously ill or injured, you know that the cost of treatment can be astronomical. Hospital bills, medications, and rehabilitation can easily run into the tens or even hundreds of thousands of dollars. If you don’t have health insurance or your policy doesn’t cover critical illness, you may be left with a massive bill to pay. Critical illness insurance is designed to help offset some of those costs. But what is it, and how does it work? Let’s take a closer look.

What is Critical Illness Insurance?

Critical Illness coverage is a type of insurance that provides a lump sum benefit if the policyholder is diagnosed with a specified critical illness. There are a variety of critical illnesses that are typically covered by these policies, such as cancer, heart attack, stroke, and organ transplant. Sometimes there are waiting periods depending on which insurance plan you choose. Therefore, it’s best to go over complete details before purchasing.

Critical Illness Insurance can be an important safety net for policyholders and their families, as it can help cover treatment costs and other expenses that may arise due to a serious illness. For example, suppose a policyholder is diagnosed with cancer. In that case, the lump sum benefit from their Critical Illness Insurance policy could help cover treatment costs, such as surgery, medication, and other medical expenses.

In addition to helping policyholders cover treatment costs, Critical Illness Insurance can also provide financial assistance if the policyholder cannot work due to their illness. For example, suppose a policyholder is diagnosed with cancer and is unable to work. In that case, the lump sum benefit from their policy could help cover living expenses, such as mortgage payments, groceries, and other bills.

CI Insurance is not intended to replace major medical insurance but rather to supplement it. Health insurance coverage typically covers the costs of medical treatment, while Critical Illness Insurance provides a lump sum.

How Critical Illness insurance works

CI policies are designed to provide financial protection if the policyholder is diagnosed with a critical illness. The insurance company typically pays the critical illness benefit amounts as a lump sum. They can be used to help cover the costs of medical treatment, lost income, and other associated expenses.

A Critical Illness plan will have a waiting period, which is the amount of time that must pass from the date of diagnosis before the benefit is paid out. The waiting period helps ensure that the policyholder suffers from a critical illness, not just a minor ailment.

To receive the benefit, the policyholder must usually survive the waiting period and be diagnosed with a covered critical illness. The benefit is typically paid out regardless of whether or not the policyholder continues to live. However, some policies may require the policyholder to survive for a certain period after diagnosis to receive the benefit.

What are the benefits of Critical Illness Insurance?

Several potential benefits can be associated with Critical Illness coverage, such as:

  • Providing financial support in the event of a critical illness diagnosis
  • Helping to cover the costs of medical treatment, lost income, and other associated expenses
  • Peace of mind knowing that you and your family are financially protected in the event of a CI
  • Supplemental health insurance plan
  • Cover out-of-pocket and everyday expenses like household bills, child care, mortgage payment, and major illnesses like organ transplants, coronary artery disease, and renal failure.

What are the drawbacks of Critical Illness Insurance?

There are a few potential drawbacks to a Critical Illness policy that are worth considering, such as:

  • The cost of premiums can be expensive, especially if you are considered to be high-risk
  • There is typically a waiting period before the policy benefits are payable, which means that you may have to pay out of pocket for medical expenses.
  • These policies cover not all critical illnesses, so it’s important to check the list of covered illnesses before purchasing a policy.

What are riders available for a Critical Illness plan?

There are a few riders that can be added to Critical Illness policies, such as:

  • Accelerated Benefit Rider – This rider allows policyholders to receive a portion of the death benefit. At the same time, they are still alive if they are diagnosed with a terminal illness.
  • Waiver of Premium Rider – This rider allows policyholders to waive their premium payments if they become disabled and cannot work.
  • Child Critical Illness Rider – This rider provides coverage for the policyholder’s children if they are diagnosed with a critical illness.
  • Spouse Critical Illness Rider – This rider provides coverage for the policyholder’s spouse if they are diagnosed with a critical illness.

Helpful tips

Medicine is advancing to help illnesses like cancer, heart attack, and strokes, but medical bills follow long after the patient’s recovery. A CI policy can help alleviate financial hardship and help pay bills that still need to be paid. There is no price on peace of mind when deciding on the what if. Critical Illness allows you to focus on your recovery, not your finances. Many people are turning to crowdfunding sites like GoFundMe to help pay their bills following a difficult diagnosis. But, there’s a better and more reliable option. Ask our insurance agent for a quote today.

The application has health questions, and the life insurance company expects to review your medical history. Availability varies by state, along with the illness covered by each state. You can supplement your health plan for additional coverage by adding Critical illness benefits. Again, coverage varies by state, along with the major illness covered. For example, the New York state department has different benefits than the Virginia state department. New York calls CI a different name in some cases. Each state has an emergency fund which you can check with their administrative services.

Nearly 6 in 10 Americans worry about paying medical costs in the event of a serious illness or accident. Gallup, “Paying for Medical Crises, Retirement Lead Financial Fears,” May 3, 2018.

Covered conditions can be as many as the following.

Some Major illnesses include:

  • Heart Attacks
  • Cancer
  • Stroke
  • Invasive Cancer
  • Non-Invasive Cancer
  • Coma
  • Burns
  • Major Organ Transplants
  • Kidney Failure
  • Paralysis
  • Loss of sight
  • Loss of hearing
  • Advanced ALS (Lou Gehrig’s disease)
  • Advanced Parkinson’s
  • Sometimes covered are coronary artery bypass, multiple sclerosis, renal failure, and more.

Conclusion

Critical Illness Insurance can be a valuable tool for financially protecting yourself and your family in the event of a critical illness. These policies can help cover medical treatment costs, lost income, and other associated expenses. However, it’s important to remember that these policies cover not all critical illnesses, so it’s important to check the list of covered illnesses before purchasing a policy.

In addition, premiums can be expensive, especially if you are considered high-risk. Despite these potential drawbacks, Critical Illness Insurance can provide peace of mind knowing that you and your family are financially protected in the event of a critical illness.

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Frequently Asked Questions

What does critical illness insurance typically cover?

Critical illness insurance policies are designed to provide financial protection if the policyholder is diagnosed with a critical illness. The benefit amount is typically paid out as a lump sum and can be used to help cover the costs of medical treatment, lost income, and other associated expenses.

Are critical illness plans worth it?

Critical illness insurance can provide peace of mind knowing that you and your family are financially protected in the event of a critical illness. However, it is important to consider the potential drawbacks before purchasing a policy, such as the cost of premiums and the waiting period before benefits are payable.

How much does critical illness insurance cost?

Critical illness insurance costs vary depending on factors such as the policyholder’s age, health, and lifestyle. However, it is typically more expensive than other types of insurance, such as health insurance.

Who needs critical illness insurance?

Critical illness insurance is typically recommended for people who are considered to be at high risk of developing a critical illness, such as those with a family history of cancer or heart disease. However, it can also be beneficial for people who do not have health insurance or who have limited coverage.

What is some alternative to critical illness insurance?

Some alternatives to critical illness insurance include health insurance, disability insurance, and long-term care insurance.

How long does it take for critical illness insurance to pay out?

Critical illness insurance policies typically have a waiting period of 30, 60, or 90 days before the benefit is payable. The waiting period helps ensure that the policyholder is diagnosed with a critical illness, not just a minor ailment. However, we do have companies that will pay upon diagnosis.

Can I get critical illness cover after the diagnosis?

No, critical illness insurance policies cannot be purchased after you have been diagnosed with a serious illness. These policies are designed to provide financial protection if you are diagnosed with a critical illness after the coverage is in place by the insurance company.

Does critical illness pay out more than once?

No, critical illness insurance policies typically only pay out once. The benefit amount is typically paid out as a lump sum and can be used to help cover the costs of medical treatment, lost income, and other associated expenses. However, there are exceptions where companies will pay out for each category.

What is the difference between life insurance and critical illness?

Life insurance provides financial protection if the policyholder dies. Critical illness insurance provides financial protection if the policyholder is diagnosed with a critical illness. The benefit amount for critical illness insurance is typically paid out as a lump sum. However, it can be used to help cover the costs of medical treatment, lost income, and other associated expenses.

Can I have a critical illness without life insurance?

Yes, you can purchase a standalone critical illness insurance policy. However, most life insurance policies include an accelerated benefit rider that provides financial protection if the policyholder is diagnosed with a critical illness. This allows you to take some of your death benefits early.

Do you have to pay tax on critical illness payout?

No, the benefit amount from a critical illness insurance policy is typically not taxable.

Does critical illness cover heart failure?

Critical illness insurance policies typically cover heart failure. The benefit amount is typically paid out as a lump sum and can be used to help cover the costs of medical treatment, lost income, and other associated expenses.

What is not covered by critical illness insurance?

Pre-existing conditions are typically not covered by critical illness insurance policies. In addition, critical illness insurance typically does not cover routine check-ups or preventive care.

How much does critical illness insurance cost?

Critical illness insurance premiums vary based on the policyholder’s age, health, and lifestyle. However, it is typically more expensive than other types of insurance, such as health insurance.

Is critical illness insurance worth it?

Critical illness insurance can benefit people who do not have health insurance or limited coverage. It can also help cover medical treatment costs, lost income, and other associated expenses.

What is an exclusion in critical illness insurance?

An exclusion is a condition or circumstance not covered by an insurance policy. Exclusions vary by policy, but common exclusions for critical illness insurance include pre-existing conditions, routine check-ups, or preventive care.

When should I get critical illness insurance?

Critical illness insurance is typically purchased when you are younger and in good health. This is because the premiums are typically lower when you are younger, and your chances of being diagnosed with a critical illness are typically lower.

What three major categories of critical illness insurance carriers often group covered conditions?

Cancer, heart conditions, and stroke are often the three major categories into which critical illness insurance carriers group covered conditions.

Does critical illness insurance cover pregnancy?

Critical illness insurance typically does not cover pregnancy. This is because pregnancy is considered a pre-existing condition.

How long does it take to settle a critical illness claim?

It typically takes around 30 days (waiting periods) to settle a critical illness claim for a covered illness.

What is the average payout for critical illness insurance?

The average payout for critical illness insurance coverage is typical $10,000. However, payouts vary based on the policy and the insurer. There are many options to choose from that are as low as $10,000 and up to $500,000 cash benefits. The larger the benefit, the higher the premium. There are coverage limits on each plan.

What is the difference between critical illness insurance and health insurance?

Critical illness insurance provides financial protection paid directly if the policyholder is diagnosed with a critical illness. A Health insurance plan typically covers the costs of medical treatment, but it does not provide a lump-sum benefit like critical illness insurance.
You can have supplemental coverage by adding CI to your health coverage to pay expenses not covered. CI is not considered a life insurance company but a health insurance company.

Is rheumatoid arthritis considered a chronic illness?

There is no one definitive answer to this question, as each insurance company has its definition of what constitutes a chronic illness. However, some insurers may consider rheumatoid arthritis to be a chronic illness.

What is the cost of critical illness insurance?

Critical illness insurance premiums vary based on the policyholder’s age, health, and lifestyle. However, it is typically more expensive than other types of insurance, such as health insurance.

What is the expected benefit ratio?

The expected benefit ratio is the percentage of people who will receive a benefit from their critical illness insurance policy. The average is 60%. This means one will claim every two people with a critical illness insurance policy.

Is critical illness considered voluntary benefits?

Critical illness insurance is typically considered a voluntary benefit. This is because it is not required by law but can benefit employees. In addition, employers often offer voluntary benefits as an added perk for employees.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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