Is critical illness worth it? The short answer is “yes.” I believe that everyone should own critical illness insurance. But whether critical illness is worth it to you will depend on why you are buying it.
There are only three reasons that you are considering buying critical illness insurance. The first is because you work for a company that offers critical illness insurance as a voluntary benefit. Perhaps you purchased health insurance from an insurance agent who tried to sell you a policy. The last reason is that you have a close friend or family member that received a cash benefit from a critical illness insurance policy.
But none of those reasons for looking at critical illness insurance is a reason to buy a policy. Later in this post, I will look at the reasons that people tend to purchase critical illness. And I will share the real reason why everyone should own a critical illness policy.
What is Critical Illness Insurance?
Critical illness insurance is a supplemental health insurance product. We define supplemental as something in addition to what is already present or available to complete or enhance it.
As a supplemental health insurance policy, critical illness insurance pays cash benefits directly to you upon a diagnosis of a covered critical illness. You receive the benefits from your critical illness policy regardless of other health insurance. These benefits supplement the benefits provided by your major medical health insurance policy.
What Does Critical Illness Insurance Cover?
When someone hears about critical illness insurance their second question is always: “what does critical illness insurance cover?”
Different critical illness policies cover a different number of critical illnesses. Some policies cover 26 critical illnesses. In comparison, other policies may cover 30 of these illnesses. And still, other policies may cover only ten or fewer.
Virtually all critical illness policies cover the basics of internal cancer, heart attack, stroke, and coronary artery bypass surgery. Also, most policies include
- Major Organ Transplant Surgery
- Alzheimer’s Disease
- Kidney Disease
How Does Critical Illness Insurance Work?
Most people want to know how critical illness insurance works. All critical illness policies pay a cash benefit directly to you upon diagnosis of a covered illness. For example, let us assume that you have a critical illness policy with a $100,000 benefit. Continuing this example, let us now say that you have been diagnosed with colon cancer. To file your claim, you will need to get a copy of the doctor’s diagnosis as well as a copy of the pathology report. You then send that to the claims department of your insurance company. Several weeks later, you will receive a check for $100,000
What makes critical illness so valuable is that the benefit has no relationship to the actual medical bills you receive. In 2014 I was diagnosed with colon cancer. The surgery to remove the cancer cells also showed that my cancer was Stage 1. None-the-less I filed my claim and received my check.
Beyond the lump-sum payment, there are significant benefit differences between critical illness policies. Some policies will pay a one-time benefit after which the policy ceases. Other critical illness policies provide a recurrence benefit should you be diagnosed with a recurrence in the future. And other policies divide the covered illness into different categories, with each category paying a separate benefit.
What Are Different Types of Policies?
There are three types of critical illness insurance. The first type is a health insurance policy that pays a one-time benefit. Next is the health insurance based critical illness policy that separates the illnesses into two or three categories. Finally, there is a life insurance policy that includes benefits for critical illness.
The One-Time Benefit
Originally, critical illness insurance was a single policy covering a list of illnesses. In this health insurance policy, a single claim concluded the life of the policy. There were no benefits if you had a recurrence. More importantly, once you received the benefit, no additional benefits were payable for any other covered illness.
This type of critical illness insurance is still sold today. However, this is the worst type of policy to buy.
Different Categories of Illnesses
Most of the critical illness health insurance-based policies will fall into this category. In this model, the covered critical illnesses with be divided into either two or three different buckets.
Then you have a policy that provides separate benefits for cancer, distinct benefits for heart attack and stroke, and benefits for critical illnesses. In my opinion, this is the best design for a health insurance-based critical illness insurance policy.
If you have had cancer, you can buy a policy that includes heart attack and stroke and critical illness benefits. If you have had a heart attack or stroke, you can buy a policy that consists of the cancer benefits plus critical illness benefits.
Let us look at one of the critical policies that I can offer. In this policy, you could receive a full benefit for a cancer diagnosis, another full benefit for a heart attack, and a third full benefit for a covered critical illness.
You can also include a recurrence benefit that would pay 50% of the original amount. For example, if you have a $50,000 initial benefit, you could receive an additional $25,000 for a recurrence.
Life Insurance with Critical Illness Benefits
Many of the newer life insurance policies include riders that pay benefits for diagnosis of a critical illness. The included benefit is generally a percentage of the face amount of the policy.
Say that you have a $100,000 life insurance policy. Your policy states that you will receive a benefit equal to 50% of the face amount upon diagnosis. In this case, you would receive a $50,000 benefit. Once you receive that benefit, that will leave you with a $50,000 life insurance policy.
Both term life insurance and permanent life policies (Universal Life and Whole Life) may include critical illness benefits. Remember that life insurance with critical illness benefits will be more expensive than a stand-alone critical illness policy.
Critical Illness Insurance Rates
Everyone wants to know about critical illness insurance rates, but that misses the point. In addition to critical illness insurance rates, you need to look at all the following:
- Number of critical illnesses covered.
- What critical illnesses are covered? The specific critical illnesses covered is more important than the number of covered critical illnesses.
- How many times will the policy pay a benefit?
- Is there a recurrence benefit?
- Are there benefits for cancer-in-situ?
- Are there benefits for coronary artery bypass surgery?
With that information in hand, you can now look at the cost. Here is a comparison of three critical illness policies. One is a 20-year-term life insurance policy that pays 100% of the death benefit upon diagnosis of a critical illness. In this case, there would be zero life insurance remaining after the payout.
The second plan is a health insurance-based critical illness policy that separates the critical illness into three different categories. The plan pays out one full benefit in each bucket as well as recurrence benefit for cancer and heart attack.
The third plan is also a health insurance-based plan. In this case all the critical illnesses fall into a single category. Plus, there is a one-time benefit after which the policy expires.
Rate and Benefit Comparison of Three Policies
|Number of Illnesses||18||18||10|
|Type of Policy||20-Year Term Life||3 Categories||1 Category|
|Number of Benefits||1||3||1|
|25-Year-Old Male Nonsmoker||$29||$20||$33|
|35-Year-Old Male Nonsmoker||$45||$41||$58|
|45-Year-Old Male Nonsmoker||$92||$74||$110|
Is Critical Illness Insurance Worth It? Conclusion
It is now time to get back to the original question: “is critical illness insurance worth it? At the top, I stated that it depends on why you want to buy it. Now we have to look at the usual reasons that people are given for buying it.
Cancer or heart attacks run in my family
There is no doubt that if one of your parents had either cancer or heart problems, there is a good chance that you will as well. And I certainly would not discourage someone from buying a critical illness policy for that reason. But ultimately, that is not the reason to buy this health insurance policy.
Along those same lines, not having a family history of cancer or heart attack is not a good reason for not buying critical illness insurance.
Cancer or heart attacks Do Not run in my family.
There have been many times that I’ve been told that cancer and heart disease does not run in their family, so there is no need for a policy. But the thing is that someone is always the first in the family to get diagnosed with cancer. Or to have a heart attack. Or to get diagnosed with Alzheimer’s disease. Not one of us has a crystal ball. And illness doesn’t care about your family history.
My health insurance has a high deductible and out-of-pocket.
I address this in my article on Gap Health Insurance. Critical illness is too narrow a health insurance product to be of value with your deductible. Unless of course, you are diagnosed with one of the critical illnesses. If you have a critical illness policy (and an accident policy) but develop Crohn’s Disease or need an appendectomy, you will receive no benefits.
I need critical illness insurance to cover the no-medical, indirect costs of care.
There is some truth to this reason for owning a critical illness policy, especially when it comes to cancer. According to the American Cancer Society’s “The Costs of Cancer”, indirect costs include: wigs and cosmetic items, mental health services, lodging near treatment facilities, caregiving costs, transportation to both local and non-local treatment facilities, and finally, loss of income.
What is the Most Important Reason to Own Critical Illness Insurance?
When we ask the question: “is critical illness worth it?” there is only one reason everyone should buy it. That one reason is to offset the loss of income.
Even if you have disability income, you may need a critical illness policy, especially if you are married or have children. Almost everyone misses that if your spouse or child is diagnosed with cancer, your disability income policy will not be of any value.
Imagine that your spouse or child is receiving chemotherapy or radiation treatments. If you have known anyone who has undergone these treatments, you know well the effects. You may have to take off work to help them deal with the side effects. Even if you have disability income insurance, it will not benefit because you are not sick.
Even if you do not have a spouse or children, having a critical illness policy is still worth it. If you end up with one of these critical illnesses you may need a brother, sister, or other relative or friend to help you. That person may have to take off from work. They will have to use their sick leave or vacation time or lose income. The cash from a critical illness policy can help provide money to help that person.
Disadvantages of Critical Illness Insurance
Critical illness insurance has its critics. A lot of financial advisors will oppose the purchase of critical illness insurance. Many of the well-known financial talking heads and columnists will also advise against the purchase of critical illness products.
But they will all recommend disability income insurance. Should you buy disability or critical illness is the wrong question. It is not a question of whether one product is better than the other.
Financial experts see one big disadvantage to critical illness insurance. That one disadvantage is that critical illness does not pay for illnesses other than those listed in the policy. At the same time, disability income will pay for any prolonged illness that keeps you out of work longer than the elimination period.
But as I pointed out earlier, disability insurance doesn’t pay if you miss work to take care of a family member or friend. Or if that family member or friend misses work to take care of you.
The most important thing that the critical illness naysayers miss is the cost. As you can see from the chart above, a nonsmoking male age 45 can buy a $50,000 critical illness policy for $74 a month. A $25,000 policy would cost a low $37 a month. What would a disability income policy cost?
The best insurance product is the one that you can afford and that can offset a big financial loss.
Work With an Independent, Professional Health Insurance Agent
I end every post with this suggestion. You have a lot of options when it comes to health insurance and supplemental health insurance. And each option is extraordinarily complex. A professional, independent health insurance agent will understand the complexities and guide you to the best choice for your objectives and budget.
If you have any questions feel free to send me an email at firstname.lastname@example.org or leave me a comment below.