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The Basics of Critical Illness Insurance Posted: April 26th, 2010

By Robert Foreman

Robert Foreman has taught English at the college level for five years, and worked previously as a corporate analyst and as a legal assistant. He is currently a PhD candidate in English, with a nonfiction writing emphasis.

Despite constant advances in medicine, nutrition and other fields, you may still contract a debilitating medical condition. Critical illness insurance may provide a needed financial safety net should you be diagnosed with a heart disease, blindness, or a deadly form of cancer.

Critical illness insurance is a form of supplemental health insurance and is meant to complement a more comprehensive medical insurance policy. Therefore, critical illness insurance should not be your only form of health insurance coverage.

The coverage works by disbursing a lump sum, ranging from $10,000 to $1 million dollars, depending on the policy and the condition, should the policyholder be diagnosed with a covered critical illness. An advantage of critical illness insurance is that the insurance benefit can be spent as you see fit, and is not subject to restriction.

Illnesses Covered

Critical illness insurance policies cover a specified range of conditions. Mutual of Omaha, for example, offers a critical illness insurance policy that covers the following:

  • Deafness
  • Coma
  • Multiple sclerosis
  • Severe burns
  • Paraplegia
  • Heart attack
  • Terminal or life-threatening cancer
  • Stroke
  • Alzheimer's Disease
  • Organ transplants

Some companies offer critical illness insurance in several categories. For example, you can buy critical illness insurance that covers cancer-related conditions or heart disease. Some policies cover only one category, while others cover several. You should choose critical illness insurance based on your individual risks and concerns.

Individual Policies Vary

Depending on the policy you select, coverage can include either a wider or more limited range of illnesses. Diseases that are not covered by critical illness insurance include relatively common ailments and injuries, such as a broken bone or the flu. Although these can be serious, they are not typically life-threatening and should be covered by your comprehensive health insurance policy.

Other conditions not typically covered by critical illness insurance include:

  • Conditions diagnosed during the policy's waiting period
  • Self-inflicted injuries
  • Suicide
  • Illness that results from illegal activity
  • Most skin cancers
  • Pre-malignant conditions
  • Balloon angioplasty surgery

Who Should Buy a Policy?

A critical illness insurance policy is useful to those whose comprehensive insurance coverage is not enough to cover the costs incurred as a result of critical illness. This includes a surprising number of people. According to the American Association of Critical Illness Insurance (AACII), 60 percent of bankruptcies filed in the United States in 2007 resulted from excessive medical expenses; furthermore, 78 percent of those who filed bankruptcy had health insurance.

You may be in need of critical illness insurance if you are:

  • Self-employed
  • In a high-risk employment situation that precludes disability coverage
  • Earning enough that disability coverage does not meet your needs
  • Those with high-deductible health insurance policies

If you are considering critical illness insurance, you should carefully review the details of your current health insurance policy to find out how much coverage is provided for critical illnesses. This may help you decide whether critical illness insurance is necessary as a supplement to your comprehensive medical insurance policy.

The Cost of Critical Illness Insurance

The price of a critical illness insurance policy is based on several factors:

  • Your age
  • Your health
  • Whether you use tobacco
  • The desired cash benefit of the policy

As your age increases, or as your health diminishes, a policy becomes more expensive. Also, if you use tobacco, you are at a higher risk for critical illness, making a policy especially costly, though perhaps more necessary.

Typical Buyers of Critical Illness Insurance

According to the AACII, 600,000 people have enrolled in critical illness insurance since 1996, when such policies were introduced to the United States. The AACII reports that almost half of those with critical illness insurance are under the age of 45. One-third of policyholders are between 45 and 54. Most of those enrolled have purchased benefits of $50,000 or less, with almost a quarter of policyholders purchasing benefits of $20,000 or less.

Where Can You Buy a Policy?

Policies are sometimes available through employers in the form of group plans. In a group plan, coverage is guaranteed and you typically don't have to undergo a physical examination to qualify.

You can also purchase critical illness insurance as an individual. But should you enroll as an individual, you may have to answer a series of questions concerning your health and undergo a health screening to verify your current health condition.

What to Look For

The ideal policy is one that pays the most for the widest range of illnesses, but be sure you can afford to pay the premiums on the policy you decide to purchase.

Pay close attention to the list of illnesses covered by a policy. The best policies are those that pay enough to suit your potential needs, and that cover many illnesses without costing too much. The AACII recommends that you buy only as much protection as you can afford without putting your financial stability at risk.

Cancer Insurance

As its name indicates, cancer insurance covers a policyholder in the event of cancer diagnoses. A cancer insurance policy only covers medical expenses that result from affliction with cancer. You should consider a cancer insurance policy if you are a high risk for cancer, and if you lack a comprehensive policy that would cover expenses related to cancer treatment.