Critical Illness Insurance: What You Should Know

In our last blog post about protecting financial assets in critical illnesses, we introduced critical illness insurance. This article will dig deeper into these unique and specialized insurance plans, which may be a good solution for those who worry about financial security if faced with a life-threatening illness such as a stroke, cancer, or a heart disease.

More Details on Critical Illness Insurance

In the previous article, we touched on critical illness insurance and some of the basics about how such insurance policies work. To refresh, these policies pay out in a lump sum if an insured person is diagnosed with a covered illness. Once the payment is made to the insured person, he or she may use that money to pay for indirect costs or for anything else that is needed. This could be mortgage payments, utility bills and household expenses, transportation and lodging as a result of treatment, or even insurance deductibles and co-pays.

We know what critical illness insurance can do, and now it is time to talk about what it cannot do. There is some confusion about these specialized insurance policies, and it is important to understand their limitations and drawbacks before deciding if this solution is right for your future needs.

Here are some aspects of critical illness insurance to be aware of:

Critical illness insurance is NOT a replacement for healthcare insurance – traditional healthcare or medical insurance is designed to cover the direct costs of medical treatment and care arising from an illness or injury. Critical illness insurance, on the other hand, is a specialized policy that helps pay for indirect expenses caused by a covered life-threatening illness. Think of critical illness insurance as a supplement to healthcare insurance, not a replacement.

Critical illness insurance is NOT the same as disability income insurance – if you are unable to work as a result of a serious illness, disability income insurance policies can replace a portion of lost wages. However, the monthly disability payments may not be sufficient to cover all of an ill person’s household expenses and indirect costs. Again, critical illness insurance should be viewed as a supplement to disability insurance.

Critical illness insurance is NOT life insurance – many life insurance plans offer certain benefits to the insured person while they are alive, such as cash values or accelerated death benefits. Life insurance has a primary purpose in that it is there to provide financial stability and security for the insured person’s loved ones upon his or her death. Critical illness insurance, on the other hand, provides a lump sum payment for covered illnesses, and is meant to be used to pay for the indirect costs and expenses associated with that illness while the insured person is still alive.

Critical illness insurance is NOT long-term care insurance – long-term care insurance pays out a fixed benefit to help cover costs of nursing home care. Some of these policies may also pay for home health care and for assisted living facility care. These policies do not pay for other indirect expenses, however – things like household expenses, specialized treatments and travel/lodging, etc. — and that’s where critical illness insurance can supplement other insurance coverages.

There are other specialized insurance plans, such as cancer insurance policies, that may appear similar to critical illness insurance but differ in significant ways. Cancer insurance plans only pay for treatment expenses related to a cancer diagnosis, while critical illness insurance plans provide more flexibility in terms of the illnesses covered and the use of payouts to cover indirect care and life expenses. As with any insurance coverage, it is vital to understand what each type of policy can and cannot do. Evaluate your current and future needs, and consult with an insurance professional to see if a critical illness insurance plan is right for you.

How Does Critical Illness Insurance Work?

Different insurance companies provide different policies in terms of critical illness insurance, but they all generally work the same. These plans typically:

Cover specific illnesses – basic policies may offer benefits after the diagnosis of “major” illnesses like strokes, heart attacks, and cancer. More comprehensive plans may cover diseases like organ failure, organ transplants, and even multiple sclerosis.

Pay out a specified benefit – each plan is different, but typically ranges from $10,000 to $100,000. This benefit is paid out in a one-time lump sum.

Pay out at a specific time after illness diagnosis – most critical illness insurance policies pay out upon diagnosis of a covered illness. However, other such plans may pay out in installments of the maximum benefit, such as upon receipt of particular illness treatments. Once the maximum benefit is paid out, the policy terminates.

Many critical illness insurance policies must be in effect for a certain period of time before any benefits are paid to the insured person. This time period generally ranges from 90 days to six months or more. Check the specifics in the policy information for details on when coverage becomes available.

What Else Should I Know About Critical Illness Insurance?

There are some other aspects of critical illness insurance plans to be aware of when selecting the right policy for your current and future needs. These include:

  • What illnesses are covered by the plan?
  • What is the maximum benefit amount, and how is it paid upon diagnosis of a covered illness?
  • How long does the policy need to be in effect before a lump-sum payout is made?
  • Can you renew the policy? If so, can it be renewed for the life of the covered individual?
  • Will policy premiums increase over time? If so, under what circumstances could the insurance company raise premium amounts?

A qualified insurance agent can help you get the answers to these questions. Critical illness insurance can help provide financial security and survival for covered individuals, offering flexibility to help cover the indirect costs and lost wages associated with a serious illness. Talk to an insurance provider today to see if this type of specialized insurance coverage is right for your needs.

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