Critical illness insurance: Coverage for the unthinkable

Mary Lou Jay

A critical illness can affect more than a person’s physical health — it also can take a toll on an entire family’s economic well-being.

A 2005 Harvard University study of U.S. bankruptcies found that about half were related to medical expenses. Even if the impact isn’t that devastating, families with a seriously ill relative can see their incomes reduced by $12,000 or more in the first year after diagnosis, according to a 2010 MetLife study. Those families also end up paying about $3,000 in out-of-pocket medical expenses in the first year after diagnosis, even if they have health insurance coverage.

The MetLife study also showed that, even three to five years after being diagnosed, 60 percent of the people who were ill still are paying out-of-pocket expenses for illness-related care.

Critical illness insurance is designed to help families bridge that income gap. It complements regular health insurance policies by providing a lump sum payment when someone is diagnosed with an illness that is covered under the policy. The policy payout can be used to help the person with the illness meet financial obligations, such as mortgage payments or utility and credit card bills, or to help with medical costs like out-of-pocket co-pays, medical equipment not covered by insurance, or travel and lodging for visits to treatment centers.

Critical illness insurance is not common in the United States; only 7 percent of the respondents in the MetLife survey had it. More U.S. insurance companies are starting to offer it, however. Premiums will vary according to the amount of coverage you want, your age and your health.

Critical illness insurance can be helpful for people who don’t have much in savings. But there are drawbacks. The policies won’t pay for pre-existing conditions, and most have waiting periods before you can make a claim. If you get sick with a serious condition during that waiting period, you’re out of luck.

When considering a critical illness policy, be sure to ask these questions:

• Which critical illnesses are covered? Policies generally pay only for those illnesses specificall y mentioned.
• What happens if I have a pre-existing condition?
• How long do I have to wait before the policy pays benefits?
• If my family has a history of certain illnesses, will the policy still cover me if I get that illness?
• How much does the policy cost now? Will premiums increase as I get older, or do they remain the same?
• If I’m diagnosed with a covered illness, when do I get the payout?

A critical illness policy may provide some financial relief for families devastated by a serious medical diagnosis, but it’s essential to understand exactly what it does and doesn’t cover before you make a purchase.