Imagine you have a heart attack. A loved one calls an ambulance. It takes you to a hospital emergency room. The physician assigned to you has to diagnose your condition and how serious it is. You may be treated with a cardiac stent or coronary artery bypass, which will require surgeons, nurses, and anesthesia.

You survive the procedure. Recovery will require a stay in the hospital. There will be follow-up visits to your doctor, cardiac rehab, and medication.

From the moment paramedics arrive, to the last pill you take for your condition, every step of your heart attack will cost money. The total bill will run around $80,000, more or less. All the entities involved will first send their bills to your health insurance provider. Depending on your coverage, the insurer will pay 80 percent of the bills. That’s the good news.

The bad news is you are stuck with the remaining 20 percent. In this scenario, that’s $16,000.

That money will have to come from your savings or be paid for in installments that will last years.

Or it could be paid for with a critical illness insurance (CII) policy.

What is critical illness insurance?

Critical illness insurance (CII) is a type of supplemental insurance. It pays a lump sum benefit if you are diagnosed with a covered illness.

It is designed to help people cover the cost of treating and recovering from expensive illnesses and procedures, such as heart attacks, strokes, and cancer. Critical illness insurance can pay for costs not covered by health insurance, such as deductibles and out-of-pocket costs. You can also use the funds for travel expenses and your regular bills.

How does critical illness insurance work?

You may be able to get critical illness insurance as a benefit through your employer. If that option isn’t available, you can buy an individual policy from a number of insurance companies that offer health, disability and/or life insurance. Several life insurance policies offer critical illness coverage as an optional rider.

If you sign up through a group plan, you are automatically qualified for coverage. Individual policies generally do not require underwriting, except for a series of yes-no questions to record any pre-existing conditions. If, however, you are seeking higher amounts of coverage, you may be subjected to full underwriting.

The insurer may offer a number of lifetime benefit amounts, typically ranging from $10,000 to $50,000, though policies are available with lifetime maximums up to $500,000. The higher the lifetime maximum, the more you will pay in premium.

Policies may also allow you to select the number of illnesses it will cover. You can choose one that covers a small number of ailments, or a broader policy that covers more than 30 conditions. Keep in mind that the more conditions it covers, the more your policy will cost.

Premiums for CII will vary, based on a number of factors. If you’re young and don’t need a large benefit amount, the premium can be as low as $10 a month. But older applicants who want far more coverage can pay 10 times that amount or more.

Also, CII premiums do not remain the same. Insurance companies raise premiums as you age. This increase may occur each year or as you reach a new “age range.” In addition, your benefits may decrease once you reach a certain age, usually around 65. Most critical illness insurance policies expire at age 70 or 75.

If you are diagnosed with a condition covered by the policy, the insurance company will pay the contracted benefit. The policy’s benefit will be paid directly to you. You likely won't have to pay taxes on the benefit, provided you pay your premiums with your after-tax income.

There typically is no limit on how you use the policy’s benefit. The policy will not stipulate that funds be used for medical expenses or recovery costs.

What is covered by critical illness insurance?

CII policies specify which categories of illnesses they cover. If your condition does not fit into a covered category, you are not eligible for benefits.

Historically, critical illness plans have focused on acute conditions. The most common covered conditions include cancer, heart conditions, stroke, and organ damage, including transplants. Some policies may also provide coverage for less common conditions, such as:

  • Blindness
  • Deafness
  • ALS
  • Cystic fibrosis
  • Severe burns
  • Major head trauma
  • Coma

The severity of your condition will determine whether or not you receive a benefit. The more serious your prognosis, the more likely you are to receive a full benefit from the policy. A life-threatening condition should result in a full benefit payment. Critical illness insurance policies also pay partial benefits for less serious conditions. And you may not receive benefits at all if the condition is easily treated, such as a cancer diagnosis that was detected early.

CII policies generally do not cover chronic conditions such as diabetes, asthma, or multiple sclerosis. They also do not cover pre-existing conditions. You can still get CII coverage if you have a pre-existing condition, but your policy will not pay benefits for serious illnesses related to that condition.

How does critical illness insurance compare to disability insurance?

CII is not a substitute for disability insurance.

For starters, CII does not cover as many conditions as disability insurance. Disability insurance covers most conditions that limit your ability to work, including broken bones, mental illness, and arthritis. These conditions would not be covered by CII, which is instead reserved for very serious conditions as mentioned above.

CII policies also may not pay enough to cover all of your losses, specifically any lost income resulting from a serious ailment. Whereas CII pays a single lump sum, a disability policy will pay you a percentage of your pre-disability income for as long as you can’t work up to the end of your policy’s benefit period.

Also, a CII benefit is a one-time payment. Once the money is gone, it’s gone.

Why buy critical illness insurance?

Your health insurance may cover most of the expenses related to a serious illness or emergency surgery, but your out-of-pocket expenses can still add up to tens of thousands of dollars. And disability insurance is only designed to cover lost income due to critical illness, not for treating the illness itself.

Two-thirds of all bankruptcy filings are at least partially caused by medical issues. Those issues, according to a recent study by the American Journal of Public Health, are the high cost of care and missed time at work due to injury or illness.

Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.

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