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Critical Illness Insurance Explained

Critical illness insurance pays out when the insured party receives a specific diagnosis. While a specific policy may cover different types of illnesses and work in slightly different ways, most policies cover a number of different illnesses and work in a similar manner. Before buying a critical insurance policy, a consumer should understand how these policies work to determine whether she needs this type of insurance.

  1. How It Works

    • Critical illness insurance pays a benefit amount to a covered person with a qualifying event. While health insurance pays for the cost of care and disability insurance can provide a stream of income to replace lost wages, critical illness insurance will typically pay a lump sum. For example, if a person receives a diagnosis of cancer the policy may pay a lump sum of $10,000 to the covered party. This amount can help the person to pay uncovered medical expenses, transportation costs or other bills, allowing them to concentrate on the medical problem and not worry about finances.

    What It Covers

    • Though consumers must carefully examine each specific policy to determine what the covered diagnoses are, most policies will cover cancer, heart attacks, bypass surgery, stroke, organ failure as well as Parkinson's and Alzheimer's disease. Some policies may also cover loss of vision or hearing or other debilitating events. Consumers should also determine what proof that the policy requires of the illness. For example, some policies may require a consumer to get a second professional opinion of the diagnosis before paying the benefit amount.

    Other Policy Differences

    • Some policies offer return of premium, which means that the insurance company will return the costs of the premium when a person dies or when the coverage expires. Though return of premium policies are more expensive, many consumers would rather pay the extra cost than buy the insurance and possibly never get any use from the money. Some policies may also pay for a person to have wellness-related medical exams such as x-rays or stress tests.

    Disadvantages

    • The premium costs for critical illness insurance are expensive, especially for those with a family history of the covered illnesses. People with a significant family medical history of covered illnesses or other risk factors may not even qualify for coverage. Though the way the benefits are paid is different, a person is more likely to benefit from disability insurance as the coverage will generally pay out for more types of medical problems, including car and other accidents typically not covered by critical illness insurance. Payouts from a critical illness policy may offset some health insurance benefits, causing the covered party to use the critical illness benefit to pay some of medical costs out of pocket.

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