I know you have a lot of financial priorities: mortgage, food, health care. If you have kids, then college savings as well. Why are we talking about critical illness? Well, a critical illness – such as cancer or heart disease – can financially wipe you out. No way, John, you say. I have health insurance. That is great to hear. You know as well as I do that health insurance premiums and out-of-pocket costs have been rising as fast as a rocket. Moreover, many health insurance plans don’t cover everything when it comes to a critical illness. In this article, we answer the question that many people have. Is critical illness insurance worth the money, when you have other financial priorities? The answer isn’t so easy. Like most answers, it depends.
We discuss what critical illness insurance is, how it works, and the different types. Moreover, we will discuss potentially, better alternatives to critical illness insurance. (Yes, you heard us right.). Finally, we provide example premiums for critical illness insurance plans. By the time you finish this article, you will have a good idea if critical illness insurance is worth it and right for you.
What Is Critical Illness Insurance?
It’s very simple. Critical illness insurance pays a benefit if you or a family member (if covered) are diagnosed with a covered illness or condition. Common conditions include cancer, stroke, or heart attack. Back in the day, these plans were called dread disease policies or specific disease policies. I would say, since the 90s or early 2000s, the insurance industry refers to them as critical illness insurance.
Many critical illness insurance policies cover the following conditions:
- heart attack
Some policies cover much more, like ALS or organ transplants. If you want a breakdown, see our best critical illness insurance policies for seniors and families.
Many critical illness policies pay a lump sum benefit upon a diagnosis of a covered illness. For example, if a doctor diagnoses you with cancer, you’ll receive a lump sum benefit. Lump-sum benefits typically range from $5,000 to $100,000, depending on the carrier. However, some carriers cover a higher benefit amount.
Other plans operate differently. They will pay you a low lump sum benefit, say $5,000, but offer ample coverage for ongoing treatments, travel, and other costs.
Even further, some plans only cover one type of critical illness, the most common being cancer. In these cases, stand-alone cancer insurance plans tend to offer much more coverage than when combined with other critical conditions, such as heart and stroke coverage.
It is important to note that coverage is available for you and your family, including children.
Critical Illness Insurance Benefits
Let’s talk about the monetary benefits of lump-sum critical illness insurance. Any lump-sum benefit, generally, is usually income tax free. You can use the money for whatever you want. You can use the money to help pay for any out-of-pocket medical costs. Or, you can use the money to help pay for child care, help around the house, your mortgage, etc.
As you can tell, one of the advantages of a critical illness insurance policy is the flexibility of using the benefit.
As we discussed, benefits range, on average, from $5,000 to $50,000. However, many carriers offer more than $50,000.
This all sounds swell, but does this make critical illness insurance worth the money to spend? We answer this question next.
Why Critical Illness Insurance Is Worth The Money?
About 15 years ago, I would have, honestly, flat out said that a critical illness insurance policy wasn’t worth it, that it is a waste of money. I said, long ago, you would be better to put any premiums towards your health insurance. Now, I have changed my position in the last 10 years. So, now, yes, I do (in general) think having a critical illness insurance policy is worth it. Why have I changed?
The situation is two-fold.
First, is the numbers don’t lie. And, second, having affordable health insurance is so out-of-reach for many Americans now.
Let’s talk about the numbers and go into detail.
The Stats Don’t Lie
Unless they involve sports, statistics don’t impress me, especially in the insurance industry. Take, for instance, a common statistic in the disability insurance industry. The Council of Disability Awareness seems to always report that the average long-term disability is 30 months. However, analyze this number deeper. In speaking to the claims department of the many carriers we use, they say that average is more like 15 months. Sure, some people face a really long-term disability for life, but very low.
However, I feel that critical illness statistics are more accurate. Consider these industry statistics that you will find with nearly every non-profit organization.
* around 1 out of 2 men and 1 out of 3 women diagnosed with some type of cancer (close to 40%) In another way, think of 10 close friends and family. Four will develop some type of cancer
* families with cancer spent almost $4 billion in out-of-pocket medical costs in 2014. That is right…billion. This staggering number doesn’t include indirect costs like time missed from work
* approximately 735,000 people have heart attacks each year with more and more young people having them as well
* fact is, many out of pocket costs are NOT covered by medical and health insurance, attested an article written from a person afflicted with ALS.
The statistics can go on and on…
And, many people go bankrupt from a critical illness such as cancer.
Secondly, you’d have to be living under a rock to not know that health insurance out-of-pocket costs have sky-rocketed. This is why high-deductible health plans have become popular. However, most families can’t afford to pay the deductible on these HDHPs. It’s a tough situation.
How Much Does Critical Illness Insurance Cost?
Enter gap health insurances like critical illness insurance, designed to mitigate the impact of these health insurance out-of-pocket costs including deductibles.
You have to analyze if critical illness insurance is worth the extra premium money for the benefit.
Let’s say you have a family of 5 (2 adults, age 40, and 3 children ages 12, 9, and 6). In looking at ACA plans, you could spend $3,000 per month on a plan with $0 deductible and $3,000 out-of-pocket maximum per person. That is $36,000 annually paid, for health insurance premiums only. Do you have this kind of money? Likely no!
A high deductible health plan costs $1500 per month, a premium savings of $1500 per month. While that is better, and you intend to bank the premium savings in case of need, your individual/family deductible is $3,300/$6,600, respectively. Moreover, your out-of-pocket annual maximum is $6,700 and $13,400 for an individual and family, respectively.
That’s a crazy amount! You can’t afford that if someone gets sick!
But, what if for a small premium, you can cover that amount with a critical illness plan should some be diagnosed with cancer, heart disease, or some other covered disease?
For our family, a $50,000 critical illness policy will cost $88 per month for our family of 5. That’s not too bad, right? That’ll cover your maximum out of pockets and certainly leave money left over for childcare expenses, utilities, other bills, the mortgage, etc
A $100,000 policy will cost around $400/month. While that is more, it covers 17 critical illnesses and has coverage for hospital stays and doctor visits for non-critical illness situations. Not all critical illness insurance policies are the same.
Who Needs A Critical Illness Insurance Plan?
For one thing, if you have cancer, heart disease, or some other debilitating disease that runs in your family, a critical illness insurance policy may make sense. Many diseases are inherited, passed from generations or skipped generations.
Even people without a family history, however, face a possible diagnosis. Those critical illness statistics don’t lie. I speak from experience as my Mom was diagnosed with colon cancer a few years ago. Thankfully, it was caught very early and she is cancer-free. (However, I now have a critical illness plan.) Cancer does not run in the family.
Secondly, you just want to have coverage in case of a diagnosis of any critical condition. The insurance gives you peace of mind.
As you can see, there is a small premium for a larger benefit. You have to remember: this is insurance. As with all insurance, critical illness insurance isn’t designed to come out ahead or to win. (In other words, you won’t make money.) Rather, you may spend years of paying premiums before ever receiving a benefit. Let’s hope not! Peace of mind is the best protection.
Alternatives To Critical Illness Insurance
Honestly, critical illness insurance shouldn’t be the first insurance you think of to protect yourself or family. Remember, this insurance will help you pay your medical bills as well as your childcare, your mortgage, or anything else. You can use the benefit for anything you want.
But, critical illness insurance may not be worth it if you don’t have the following insurances. Consider these insurances first before considering a critical illness insurance policy.
Disability insurance pays you a benefit upon disability and you can’t work. In case you did not realize, being diagnosed and treated for cancer or some other debilitating critical illness is likely a disability. Moreover, disability insurance policies protect you from disabling accidents. Or, some other illness. Unlike a critical illness policy, disability insurance pays out a monthly benefit as long as you are disabled. That can go on for months and months. Moreover, disability insurance covers much more than the specific conditions outlined in a critical illness insurance policy. For example, if you are a massage therapist and damage your forearm and can’t work, that is a disability. A disability insurance policy will pay in this case. A critical illness policy will not.
In my opinion, a disability insurance policy is far more important than a critical illness policy. It will cover you, really in any case, that you are disabled and can’t work.
Long-Term Care Insurance
This type of insurance is more for older people, but a critical illness insurance policy can’t replace the services from a long-term care insurance policy. What is long-term care insurance? It helps you with custodial needs such as meeting your activities of daily living (ADLs). Your ADLs include toileting, walking, and eating. I describe ADLs as though you need help starting the first 20 minutes of your day. In other words, if someone needs to assist you with walking up and getting your day going (your first 20 minutes of your day), you probably need long term care insurance.
Now, a critical illness can lead to custodial care needs. Say you have a stroke and ultimately need care in an assisted living or home care. A long-term care policy can pay for years and even protect your assets whereas a critical illness policy will not. The critical illness insurance policy pays, usually, a lump sum that helps with some medical bills and needs. It is a short-term payment. A long-term care insurance policy pays for months or years for your custodial care needs.
General Out-Of-Pocket Insurance
You have disability insurance, but don’t need a long-term care insurance policy, and like the thought of having additional insurance protection against high medical costs. But, you don’t want to limit yourself to specific, covered conditions in a critical illness insurance policy. No worries. There are out-of-pocket insurances or hospital indemnity insurance that will cover you not only upon a critical illness condition, but also anything else, such as an accident or injury.
As you guess, these plans are broad with coverage, but they will cover in every instance. Some plans actually coordinate with your underlying health insurance. The plan pays for any deductibles and other out-of-pocket costs. Let’s say you had an ER visit from a fall that costs $2,500. Your deductible is $3,000. You think, “Ugh, this is going to be an expensive bill!“. However, your out of pocket protection pays for that $2,500.
Same with critical illness insurance. However, critical illness won’t cover an accident or a non-covered illness. These out-of-pocket protection plans will cover anything (per the contract). They will pay upon a doctor visit or treatment at a hospital. These plans will only cover up to a maximum bank amount you specify. After that, coverage depends on your underlying health insurance.
Is critical illness insurance worth the additional money to spend? Generally speaking, I think so, especially with increased deductibles and out of pocket costs on health insurance. Moreover, the incidences of a critical illness like cancer seem to be everywhere. Be honest: you know someone who has, or went through, cancer treatment, a heart attack, ALS…the list goes on.
The decision if critical illness insurance is worth the money depends on you. We gave you a few alternatives that might be better. If you have questions, feel free to contact us or use the form below. Additionally, you can check out the critical illness insurance plans we like the most.
As always, we only work in your best interest. We won’t strongarm you into a plan like many agencies do (or try to). The right plan and decision really depend on you and your needs. We have the ability and knowledge to help your situation really in any way possible.