Sunday, February 21, 2016

The Definitive Guide to Critical Illness Insurance

A critical illness insurance policy pays a lump sum benefit to you in the event you are diagnosed with certain covered critical illnesses. To help you make sense of these unique polices, I've put together this extensive guide to critical illness insurance policies.

RESOURCE: This guide is a part of my larger guide called The Definitive Guide to Workplace Benefits. Be sure to check it out.

What Is Critical Illness Insurance?

Once you are diagnosed with a covered critical illness, a critical illness insurance policy pays you the face amount of the policy. If the face amount is $10,000 and that covered illness pays a 100 percent of the benefit, then you'd receive $10,000.

Since benefits are paid directly to you and not to a hospital or other medical provider, you can use the money however you wish. You can use the money to pay for health care expenses, bills you may have, loss of income or even put it towards a new car if that's what you want to do.

Once the claim is paid, it's your money to do with as you please.

While these policies don't help you with every medical problem, at least if it's one of the covered critical illnesses, you can receive benefits.

What Does Critical Illness Insurance Cover?

Critical illness policies, specified disease policies, or dread disease policies as they use to be called, cover way more illnesses than the specific cancer only policies used to. As with most insurance coverages offered at work, covered critical illnesses will vary depending upon the insurance company that's selected. Every insurance company designs their plan differently.

But to give you an idea of the types of conditions you might see, below is a sample list of the conditions I've seen covered by the last three companies I reviewed.

While you might see a condition in your policy that's not listed below, you'll probably definitely see all of the top five most common critical illnesses which are 1) heart attack, 2) cancer, 3) kidney failure, 4) stroke and 5) coronary bypass surgery.

  • Heart attack
  • Cancer
  • Kidney failure
  • Stroke
  • Coronary bypass surgery
  • Carcinoma in SITU
  • Kidney (renal) failure
  • Major organ transplant
  • Ruptured cerebral
  • Cartoid or aortic aneurysm
  • Blindness
  • Coma
  • Paralysis
  • Severe brain damage
  • Skin cancer
  • Angioplasty & stent insertion
  • Severe burns
  • Alzheimer's disease
  • ALS (Lou Gehrig's disease)
  • Loss of hearing
  • Loss of speech
  • Benign brain tumor
  • Occupational HIV

In addition to the above sample of conditions, I've seen additional illnesses listed in coverages for children - like Type 1 diabetes, cystic fibrosis and down syndrome to name a few.

In most cases, the lump sum payment for each covered critical illness will be paid out at a 100 percent. Some conditions are paid out at a lower percentage like 25% or a flat amount.

One of the most confusing aspects at least to me with these policies is how cancer is covered. Oftentimes, you'd think if you got diagnosed with skin cancer, you would qualify for full cancer benefit. But it really depends on the definition of cancer. There's skin cancer, carcinoma in situ and life threatening cancer. Depending on which one you have, they all pay differently.

Do I Need Critical Illness Insurance?

One question I get asked a lot is why should I buy critical illness insurance?

It's no secret that health insurance costs have risen dramatically. In response, employers have looked for ways to contain these rising costs by increasing the percentage of the premiums employees have to pay as well as increasing the deductibles, copays and coinsurance amounts they are responsible for as well.

To give you an example of what's becoming a common trend, a company I recently enrolled into a critical illness plan had a group health insurance plan with a $5,000 individual deductible and a $10,000 family deductible. Nothing was covered by the insurance until the deductible was met. There were no copays at the doctor and no prescription copays.

While the insurance would kick in and pay 100 percent of the claims after the deductible was met, most people won't have that kind of money to shell out on top of the premiums they also pay.

So to help employees cover some of these costs, insurance companies began offering policies that paid cash to you in specific situations. Those situations are when you are diagnosed with a covered critical illness as defined in the policy.

Because these out of pocket expenses medical expenses have risen so dramatically, that's why you might need critical illness insurance.

Nine Reasons You Should Get Critical Illness Insurance

What I've done below is put together a list of nine reasons why you should consider getting a critical illness insurance policy. Let's go over my list of why you should buy critical illness insurance and the reasons it might make sense for you.

  1. Critical illnesses cost you a lot of money If you get a critical illness, odds are it will be expensive. You'll have doctor's appointments, treatments, medications and your income will most likely go down. Cancer is an example of an expensive critical illness. I found a whole bunch of people looking for financial assistance from If you read through some of those questions about assistance, you'll get a better understanding of the financial burden a critical illness, like cancer, would be.
  2. You have a high deductible health insurance plan It's not uncommon for employees to have medical plans with very high deductibles. In fact, this article from CNN says the average deductible now is over $2,000 a year. I've talked with employees who have a $5,000 annual deductible. That's a lot of money. It's an amount of money that may seem small when you say it, but when you have to pay it out of your own pocket, it makes you say ouch! It makes sense to buy critical illness for at least the amount of your health insurance deductible. Don't forget to add in the possibility of co-payments and co-insurance. If you can afford it to do it, match up the face amount of your critical illness policy to your health insurance plan's out of pocket maximum.
  3. You have a family history of critical illnesses If your dad had a heart attack, and his dad did too, the Centers for Disease Control and Prevention says your family medical history and environment puts you at risk for one too. If the critical illnesses covered under the policy run in your family, then I'd strongly consider it.
  4. You are a smoker If you smoke, you are at a higher health risk than those who don't smoke to get diagnosed with a critical illness. According to the University of Iowa smoking puts you at a major risk for heart attack, stroke and cancer - all critical illnesses. Since you are at a much higher risk if you smoke, you should strongly consider getting a policy if you do.
  5. You have pre-existing conditions and it's guaranteed issue If you already have a number of health problems and the critical illness policy is offered on a guaranteed issue basis (meaning you don't have to answer medical questions to get it), then I'd also strongly encourage you to enroll. Keep in mind that some critical illness policies won't pay during a pre-existing condition limitation time period. But once you are out of the time period, the policy would pay. Read the offer carefully and strongly consider buying as much as you can afford. 
  6. You can lock in your premium at your current age If you are being offered a critical illness policy that locks your premium in at the age you buy it, then that's a strong reason to take a serious look at it. Some critical illness policies have rates that go up as you get older. If you can lock your rate in at a younger age, that's a huge advantage and another good reason to take a good look at buying it.
  7. You are young and the yearly wellness screening benefit covers your annual premium A lot employees under 25 can buy critical illness insurance with a face amount of $5,000 for around one dollar a week. That's an annual cost of $52 per year. If the policy has a wellness screening benefit of $50 per calendar year, that pretty much pays the premium each year. If it's an issue age policy that doesn't go up in rate as you get older, that's a great value. It will pay for itself every year. If that applies to you, then you should strongly take a look at enrolling.
  8. You don't have any money saved up If you are fortunate enough that you have a low deductible health plan, but you are like most people the USAToday says doesn't have any money saved up, I'd consider it as well. Obviously, you'd want to pick up disability income insurance first, but you could have a heart attack and be able to return to work fairly quickly. If you have a 30 day waiting period on your short term disability, and returned to work before those thirty days but missed 20 days, you'll still need some money to replace your lost income and critical illness insurance could help.
  9. To protect your health savings account If you have an HSA, just because you put money in your health savings account, doesn't mean you need to spend it on the a critical of illnesses. There are a lot of medical conditions that aren't critical illnesses that you might need money for too. So buying critical illness insurance could protect some of your health savings account when diagnosed with a covered critical illness. That would make more of your HSA available for the other illnesses not covered by a critical illness policy.

Those are nine reasons you might want to buy critical illness. You should consider those reasons in making your decisions on whether to buy a policy or to waive your opportunity.

Now let's talk about some additional factors you should look for when buying a critical illness policy.

What To Look For When You Buy A Critical Illness Policy

When I meet with employees, I share with them the rules that govern their policies. There are so many rules, most employees probably forget most of what I tell them. This is especially true if you are doing a core enrollment at the same time and reviewing all of an employees benefits.

With that in mind, here are some additional things that you might need to know when you buy a critical illness policy.

  • It only pays in the event of a covered critical illness Remember, a critical illness policy is not designed to pay for every condition. It will only pay for the types of conditions covered under the policy. If you get the flu and go into the hospital, you can't expect it to pay for things not outlined in the policy.
  • The definitions in the policy determine whether payment is made When you are diagnosed with what might be a covered critical illness, you'll need look at your policy or policy certificate and read the definition in the policy to see if it qualifies. If you need help deciphering it, contact your agent who set it up for you or contact the insurance company. A good agent will have a copy of these definitions in a sample policy that you can read before you sign up. Just remember that agents aren't doctors and so it's impossible for your agent to know every conceivable scenario. The only way to know for sure if a complicated situation meets the definition is when a specific claim is submitted and it's reviewed by the insurance company. 
  • Understand when coverage begins, any waiting periods and how it covers pre-existing conditions All of the rules that govern when you are covered, what you are covered for and what is excluded can be hard to remember. Just know these rules are common in critical illness policies.
  • Will it pay more than once? This is another "hard to remember rules" area that I always have to explain. Check to see if the policy will pay multiple times. Obviously, paying for multiple conditions or paying again for the same condition is an important feature you want to see. The more the better.
  • Is it portable if you leave your employer? Many critical illness policies are written as group contracts which means you don't own the coverage. However, it still might be portable if you leave your employer. There might be rules that require you to keep it for a certain amount of time while you are employed before portability is an option. If you leave your employer, contact your human resources department and your agent right away to check on portability. Don't wait for them to contact you. You might only have a small window of time to take advantage of the portability option.
  • Are the rates guaranteed to never change? The main thing to look for first is if the rates go up as you get older. If they do, you might get to a point where you can't afford to keep it when you get older. If rates go up as you get older, ask to see the current schedule of how that happens. It's unlikely that your premiums will be guaranteed for life. It's more common that the insurance company could raise rates depending on experience. You are probably protected a little more from surprise rate increases with a group policy than an individual one. What insurance companies do sometimes if they need to raise rates is to raise rates on new participants and leave the old participants under the same schedule. Since there are so many insurance companies and plans, you'll just have to check into it.
  • Does the face amount ever reduce? Many plans reduce the face amount when you get older but keep the premium the same. Be aware of that and just know that it will happen.

That's a good recap of some important things to look for when you buy a critical illness policy.

Let's move on and talk about who you can cover under a critical illness plan.

Who Can Be Covered?

Critical illness coverage can be purchased on the employee, their spouse and children. It's typical that employees have to purchase coverage on themselves to cover their family. In addition, the spouse and children might be limited to a percentage of the amount the employee buys.

While the employee and spouse have to pay a premium, it's pretty common to see children covered for free as part of the policy. Employees often ask if they can cover parents or other family members outside the spouse and children but that's not the case in any critical illness policies I've seen.

How Much Insurance Can You Buy?

Lump sum coverage amounts on employees vary from $5,000 to $50,000 but can be higher. Depending on the insurance carrier, the spouse can buy either a percentage of the employee amount or up to an equal amount.

Children are a percentage of the employee's face amount as well.

NOTE: If you are wonderingIf you have high deductible insurance plan, have a family history of any of the critical illnesses or smoke, I'd encourage you to purchase a policy. If For a more detailed list of reasons you might consider read my article called Should I Buy Critical Illness Insurance.

Will The Policy Pay More Than Once?

Of the policies I reviewed, each of the policies would pay more than once. But the rules from company to company are going to vary. Some companies won't pay for the same condition twice, others lump them into categories or buckets. Others, allow unlimited payments as long as enough time elapses between the diagnosis.

An occurrence is a diagnosis. Here is some common phraseology you might see regarding the definitions of occurrences.

  • Initial occurrence An initial occurrence is the first time you are diagnosed with a critical illness.
  • Re-occurrence A re-occurrence is a diagnosis of the same critical illness. 
  • Additional or subsequent occurrence An additional or subsequent occurrence is when you are diagnosed with a new critical illness.

You'll have to read the contracts and sales materials for the policy you are considering purchasing to know for sure. All companies will handle all diagnosed critical illnesses that occur after the first one differently.

What Are Health Screening Benefits?

Most insurance companies include a health screening, or wellness benefit as part of their critical illness policies. This is a one time per year payment of $50 to $100 that an employee can receive if they get a health screening test.

Just like everything else, which screening tests are covered depends on the insurance company. Here's a sample list of the types of screening tests that might qualify:

  • Pap smear
  • Breast ultrasound or mammography
  • Colonoscopy
  • Chest x-ray
  • Serum cholesterol
  • Stress test

I've seen 15 or 20 tests that qualify for the health screening benefit so that's just a small list.

If you also cover your spouse on your policy, it's likely you be able to claim a health screening benefit for them. The rules on children vary from company to company but it's possible you might be able to claim a health screening benefit for them as well.

Many people forget the health screening benefit is part of their policy or are just to lazy to file a the paperwork to claim it. For young people under 30, depending on the insurance company, you might find that claiming it basically covers the cost of the annual premium for a $5,000 policy.

What About Pre-existing Conditions?

These days, as an employee, you can often get a critical illness policy without any medical questions. (at least the first time it might be offered to you) Whether coverage extends to pre-existing conditions depends on the insurance company and the types of underwriting they offer. Some won't cover them at all and others require a certain amount of time to have elapsed before you will be covered. I talk more about how pre-existing conditions are covered in my post about pre-existing condition limitations and exclusions.

When Does Coverage Begin?

Coverage begins at different times for different insurance companies. Some companies begin coverage the date you sign up and others at an effective date in the future. It's also not uncommon to have a waiting period of 30 days after your coverage is effective for coverage to actually begin. 

What Should I Do If I Am Diagnosed?

Obviously, once you are diagnosed you should submit a claim to the insurance company. If everything is in order under the definitions of the policy, you should receive payment without any problem.

Some policies are guaranteed issue but exclude payouts on pre-exisiting conditions. You might receive a diagnosis during a pre-existing period and know you won't qualify. It's tempting to not file a claim and turn yourself down.

I always tell everyone to file a claim if you have a diagnosis and make the insurance company decide. Don't decide for them even if you know you'll be turned down because of a pre-existing condition clause. I also recommend letting your agent know that you have a claim so they can assist you if you need it and guide you through the process.

A diagnosis after the effective date in a pre-existing period or during a waiting period still counts as an initial diagnosis even if you don't report it. You might as well report it anyway.

Other Frequently Asked Questions

Here's a list of the common questions I get about critical illness:

  • Are critical illness premiums before tax or after tax deductions? Deductions are after tax so the benefit amount if it's paid is not taxable.
  • Why do I need a beneficiary? You could have a heart attack and die from it. It's a good idea to name a beneficiary just in case that happens.
  • Should I replace my cancer policy with a critical illness policy? When working with employees, I often get asked, should I get rid of my cancer only policy. It tell them that it really depends. Many of the older cancer policies work a lot differently and don't just pay for a diagnosis but also for treatment you might receive. Policies like that could still be extremely important and pay way more than the lump sum benefit of a critical illness policy. Like anything, it's going to depend on the policy you have in place. 
  • What is carcinoma in SITU? This is an early stage cancer that has not spread to surrounding tissue.
  • How much critical illness insurance do I need? I recommend that you buy at least the amount of your deductible. The younger you are, the more I recommend you buy because deductibles will continue to rise.
  • Can I still claim my health screening benefit if I didn't pay for the test? Yes. What matters is the test and not whether you pay for it or not.
  • Do my rates go up as I get older? This will depend on the policy you are buying. Some policies are set up as issue age meaning your premium will be based on the age you were when you bought it and not go up as you get older. Other policies are set up as attained age and will go up as you get older. You'll have to read the offering to know for sure.
  • Is my policy portable if I leave employment? Most policies offer a portability option but most require a certain length of time owning the policy like 6 months to a year before that option is available.
  • Are my rates guaranteed to never change? Rates may not be guaranteed for life in the policy. This is going to depend on the actual experience (claims received and paid) by the insurance company. Typically what happens is if the rates aren't guaranteed for life that the insurance company won't raise the rates on existing policyholders but just change rates for all new participants going forward.
  • Is it a lifetime policy? This will depend on the insurance company. Most put in an age reduction feature that kicks in at a certain age, similar to how group life insurance decreases at certain ages. The premium will stay the same but the coverage will decrease. Other companies have a specific age that the policy terminates like age 100 for example.
  • Do I get a policy? While the employee usually pays 100 percent of the premium, most critical illness plans are issued as group contracts. A group contract is a contract between the employer and the insurance company. As a result, you as the employee may or may not get an actual contract but you may get a group certificate.
  • Are the rates the same for smokers? Some carriers have what are called unismoke rates where they blend the rate into one rate for smokers and nonsmokers. Other carriers separate out the two so it will depend on the insurance company.

As Always Everything Depends - Read The Contract!

The best thing you can do is always read the contract. Every insurance company and every offer is different and may vary with the information in this post. In the end, the language in the contract is what matters.

Do you own a critical illness insurance policy? Let me know your reasons for buying it in the comments below.

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Michael is a champion of guaranteed issue for employees in the workplace. He's been an insurance agent since 1992 and has worked with thousands of employees.