The basics of critical illness insurance

People are living longer today. Although survival rates are on the rise for many medical conditions, a debilitating illness and the costs associated with loss of income can lead to medical bankruptcy.

A 2008 study by the American Cancer Society and the Kaiser Family Foundation that found 20 percent of people with health insurance still can’t afford cancer therapy. In fact, the survey found that a year of treatment for blood cancers such as leukemia reached $1 million in 2008, which would max out the limits of most health insurance policies.

Even with advanced medicine and a health insurance policy on your side, if you are diagnosed with a life-threatening illness, there is a possibility that you would not be able to afford the treatments recommended and needed. Critical illness insurance can help.

What does it cover?

Critical illness insurance provides a payment if you experience a critical illness that is covered under the policy contract. You don’t have to be disabled to collect. Unlike disability insurance, you don’t have to be employed to receive the benefits. For example, Aflac offers an individual critical illness policy for residents of most states that pays $10,000 to $30,000 if you develop a condition that is covered, with another $5,000 benefit for any recurrence of the same condition or new covered occurrence after 180 days.

A critical illness insurance payment is typically made in a lump sum and can be spent however you please — use the money for medical bills, a wheelchair, retrofitting your home, your mortgage or other bills, home health care or even a Hawaiian vacation. Medical conditions that qualify usually include serious injuries, diseases and major surgeries.

Critical illness insurance can be purchased several ways, including:

• On your own as an individual policy.
• As part of workplace benefits, either through employer-paid benefits or payroll deduction (where you pay the premiums and they are deducted from your paycheck).
• As a supplement to a health insurance policy.
• As a supplement to a life insurance policy.

Two types of policies are available through a place of employment: true group and worksite, says Barry Eagle, vice president of marketing for Gen Re LifeHealth, With true group plans, a master policy is issued to the employer, and employees who sign up receive certificates under that master policy. Worksite policies are individual ones sold to employees at the workplace. Janet Buzil, president of the National Association for Critical Illness Insurance (NACII) and second vice president of marketing for Trustmark Voluntary Benefit Solutions, estimates that 90 percent of critical illness policies are purchased through workplace benefits.

Some insurance companies bundle critical illness coverage into categories, and you can make claims in multiple categories. For instance, one category could cover cancer-related conditions, another category could cover heart-related conditions and a third category could cover organ transplants, kidney failure or severe burns. You can buy a policy that pays for one category of conditions or a policy that covers all three condition categories.

For example, if you buy a policy with multiple categories and you suffer a severe stroke that has the potential to occur again, you might receive 25 percent of the benefit amount, and the remaining 75 percent could cover another condition or a recurrence of the same condition while the policy is in force.

Critical illness insurance limits typically run from $10,000 to $1 million. The NACII recommends determining the amount of coverage you need by adding these two amounts:

• Two to three years’ worth of your mortgage payments or rent
• The total of your outstanding credit card debt

Examine your policy’s waiting period, also called the “elimination period,” which is the time you have to wait after diagnosis before receiving the insurance payment. For most policies, if you die of the critical illness during the waiting period (and have no special rider to cover that), no benefits will be paid to you or your estate.

Before buying a policy, understand its exclusions and limitations. Typical exclusions include critical illnesses that are diagnosed during your policy’s waiting period, self-inflicted injury, suicide or illness resulting from illegal activity. Other exclusions may include balloon angioplasty surgery, pre-malignant conditions or conditions with malignant potential, and most skin cancers.

Most critical illness policies are issued for a minimum of two years and a maximum of 20 to 25 years. If you are over age 65, most insurers will not sell you a policy. If you purchase a policy in your early 60s, the cost will be steep.

Some insurers sell supplemental critical illness policies only to customers who purchase major medical plans.

While individual and worksite policies are medically underwritten, meaning the price is based on your individual factors, if you buy coverage from a group plan, it is considered “guaranteed issue.” For group plans, the price is determined by your age and the number of people who work for the company, and no medical questions are asked. However, group plans will exclude coverage for any conditions you had before the policy took effect.

If you are buying an individual policy, you will likely have a phone interview from the insurer’s underwriting department, as well as oral fluid, blood and urine tests. If you have a heart condition or family members with a heart condition, you could be required to take a medical examination, EKG, paramedical examination, treadmill electrocardiogram (TEKG) and, if you are a smoker, a chest X-ray.

Critical illness insurance is priced with several factors in mind, according to Eagle. Your age, height, weight, family’s health history, nicotine use and conditions you have now that could lead to more serious conditions are considered. An individual critical illness plan usually starts at about $21 a month for a 40-year-old male nonsmoker and goes up, depending on your age and the amount of the benefit you choose, Eagle says. Females may be charged an extra 10 to 15 percent.

A true group critical illness insurance plan costs about $8 for a nonsmoking 18- to 24-year-old employee, estimates Buzil. An employee in their 40s could pay about $40 a month. Someone between age 60 to 64 could pay $230 a month for the same coverage. Premiums increase as you reach different age brackets.

In contrast, says Buzil, worksite critical illness insurance plans have level premiums that are based on your age at the time of issue and do not increase. Someone who applies at age 40 might pay $22 for life, whereas someone who applies at age 60 might pay $66 for life.

When it comes to family history, you could be declined for an individual policy if you are a female under age 50 who has two or more first-degree relatives who have been diagnosed with breast cancer. This can include a mother, a sister or an aunt. If you have two or more first-degree relatives who have been diagnosed with cancer, heart disease or kidney disease before the age 65, with a group plan, you could be charged more for the policy or declined, or have your maximum benefit set to a lower amount—say $50,000—depending on the insurer.

With individual plans, you pay premiums until the policy pays out the maximum benefit, Eagle says. Group policies may end upon termination of employment or may be ported to a group trust, after which you would pay your premium directly to the insurer. In the latter scenario, you would pay until the insurance pays out the principal sum insured.

“If you died from a heart attack and the maximum benefit is $50,000, and the cost of treating you for a heart attack reaches the full maximum benefit, insurance would pay out the full maximum and then the policy would terminate,” says Jeanne Reynolds, spokesperson for Colonial Life.

Paying the bill

The insurance company will generally cancel policies if premiums aren’t paid, if the maximum payout is made, if you die or if you request cancellation.

You won’t get your money back or a reimbursement if you cancel or if you never get sick, unless you buy a critical illness policy with a “premium return” feature. For instance, if you die during the policy’s waiting period and have a return-of-premium death rider, any premium you paid will be returned to the beneficiary listed on your policy or your estate. To receive the returned premium, you cannot die from a condition or event that is excluded or that isn’t defined in the policy. For example, if your policy does not cover an aneurysm and you die from one, your family cannot take advantage of the return-of-premium death rider. If you die from an excluded illness such as skin cancer, premiums will not be refunded.

The NACII recommends looking for the following in a critical illness policy:

• Lump-sum benefits, which are paid when you are diagnosed with a common catastrophic illness.
• Transportation benefits, which help you cover the cost of travel to and from a medical center for treatment.
• Coverage for regular diagnostic tests, such as mammograms, pap smears and colon screenings.

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