Critical Illness Insurance

Critical Illness Insurance: A Financial Lifeline

If you end up in the hospital with a serious illness, the costs can be prohibitively expensive. Some of the costs for surgery, treatment, recovery, and medications will be covered by health insurance. But what about out-of-pocket expenses such as deductibles? What about your mortgage and child care expenses? What about lost wages while you're hospitalized?

Individuals diagnosed with major illnesses can get financial help from a product called critical illness insurance. According to Jesse Slome, executive director of the American Association for Critical Illness Insurance, it pays a lump sum of cash immediately upon diagnosis.

This one-time, tax-free payment can be used in any way the patient sees fit. If the amount is greater than what is required to pay bills, the excess can be saved or used for "a celebratory vacation trip," according to Slome. "You can keep everything."

Why was critical illness insurance created?

According to Slome, critical illness insurance is relatively new in the United States but has been widely available in other countries for many years, including Canada and most European countries. It grew out of Dr. Christiaan Barnard's heart transplant work, a South African surgeon whose brother, Marius, noticed that patients were healing but going bankrupt.

According to Slome, the leading cause of bankruptcy is medical bills, despite the fact that roughly 70% of those who file for bankruptcy have health insurance.

"You can lose your job, but the bills don't stop," Slome explains.

According to MetLife's 2010 Financial Impact of a Critical Illness Study, deductibles, co-pays, uninsured prescription drugs, and other out-of-pocket costs for a typical family can exceed $6,500. Furthermore, 60% of people with serious medical conditions continue to incur these out-of-pocket costs three to five years after their diagnosis.

According to Slome, critical illness insurance is frequently sold in conjunction with home mortgages.

"Your chance of dying before paying off the mortgage is small," Slome says, "but your chance of having a critical illness (while paying off the mortgage) is enormous."

What does it cover?

Critical illness insurance can help with expenses such as:

• Experiencing treatments, medications, and procedures not covered by traditional health insurance outside of your policy's coverage network.
• Income replacement during treatment and recovery.
• Covering treatment-related travel and lodging expenses.

Insurance against critical illness Slome says it "allows you to focus on your recovery rather than financial stress."

According to the American Association for Critical Illness Insurance, transplants are among the health issues that would qualify for coverage, as are severe burns, paralysis, heart attacks, kidney failure, and stroke. When it comes to pre-existing conditions, your policy may have exclusions. For example, your policy may exclude any conditions diagnosed in the year preceding its effective date. Alternatively, it may have a waiting period after the policy takes effect during which no expenses related to a pre-existing condition will be covered.

Some policies include what are known as survival periods. According to the American Association for Critical Illness Insurance, a survival period is the number of days you must live after being diagnosed with an illness. If you die during the survival period, your estate may be entitled to a refund of all premiums paid, but not the full benefit of the policy.

Who should buy it?

Slome recommends this type of coverage for people in their late 30s and early 40s.

According to Ben Coleman, business development manager with Disability Insurance Services in San Diego, this coverage could be ideal for non-working spouses as well as people in high-risk occupations who do not qualify for disability insurance (such as active military members, firefighters, and police officers).

What makes it different from the rest?

According to Coleman, critical illness insurance complements but does not replace disability insurance. Both types of insurance are designed to provide financial assistance to people following an illness or injury.

According to Coleman, the most significant distinction between disability insurance and critical illness insurance is that disability covers both injuries and illnesses, whereas critical illness insurance only covers illnesses. In addition, whereas critical illness insurance provides a one-time, lump-sum payment, disability insurance typically provides monthly payments over a longer period of time.

"Disability insurance protects your paycheck, whereas critical care insurance protects your assets," Coleman explains.

How much does it cost?

The cost of critical illness insurance is determined by a number of "moving points," according to Slome, which include:

• The amount of money that someone wishes to receive.
• Age.
• Whether the insured person smokes or does not smoke.
• Existing health conditions.
• Height and weight.

A 40-year-old man who does not smoke could expect to pay between $180 and $220 per year for coverage, according to the American Association for Critical Illness Insurance. A 40-year-old woman who does not smoke may pay slightly less — $145 to $185 per year.

MetLife, Aflac, American General Life and Accident Insurance, Assurity Life Insurance, and Mutual of Omaha are among the companies that offer critical illness insurance.

According to the American Association for Critical Illness Insurance, benefits for critical illness policies typically range from $5,000 to $1 million, with the majority falling between $10,000 and $50,000.