Many employers are now offering critical illness coverage to offset the rising costs of co-payments and premiums. Critical illness coverage pays a lump sum if you get a specific illness. Many times, the policies pay the lump sum if you are diagnosed with cancer or have a heart attack or stroke. It is designed to pay out-of-pocket expenses and to defray costs associated with your treatment.
About Critical Illness Coverage
Basic critical illness coverage is voluntary coverage, which means that you will pay the full amount of premiums, although at a discounted rate if you purchase it through your employer. This is different from major medical coverage, for which your employer may pay a portion of the premium costs. Premiums are often fairly low with critical illness coverage, and the lump sum payments typicallu start at around $10,000. In the past, critical illness coverage included only acute, non-chronic illnesses, but that has changed over the past few years. Now, critical care policies cover diseases like cancer, heart attack, stroke, kidney failure, organ transplants and even ALS, also known as Lou Gehrig’s disease. Many still do not cover common chronic illnesses, like diabetes.
Basic coverage often does not require medical underwriting, although some policies offer additional coverage if you agree to undergo the underwriting process. For example, some policies offer lump sum amounts as high as $100,000, but you must answer questions regarding your medical history as well as family history. If you respond that you have been treated for chest pain or an elevated PSA test, you could be denied the additional coverage.
Even if your policy covers specific diseases, such as cancer, they may have restrictions on how lump sum payments can be made. For example, a policy may pay the full benefit if you are diagnosed with a malignant tumor that is “characterized by the uncontrolled growth of malignant cells and invasion of tissue.” You may only receive partial benefits, however, if you are diagnosed with “cancer in situ,” which is cancer that is microscopic and localized. This could include Stage 1 or Stage 2 prostate cancer or localized skin cancer. Cancers that are slow-growing and not expected to be harmful, such as some types of skin cancer, may not be covered at all. It is important to review the fine print in your policy to learn what limits you have and what types of illnesses are covered.
Policies may have additional restrictions that could affect your payments. Some have what are known as age-reduction schedules with lower payouts as you get older. Most policies are portable, so you can continue them if you change jobs, are laid off or retire, but some don’t allow transfers. If your employer pays part of the cost of the premium, your lump sum payments can be subject to income tax. But if you pay the full premium yourself, you won’t have to pay taxes if you accept the payment.
One of the benefits of critical illness coverage is that you can use the lump sum payment for any expense, and it’s not tied to your major medical insurance coverage. This means the money can be used to pay your regular expenses like mortgages and car payments while you’re undergoing treatment for the illness. It can also be used for co-payments, deductibles or amounts your insurance does not cover. If you need childcare or transportation during treatment, the funds can be used for those as well. Many financial experts say that creating a rainy-day savings account or placing money in a flexible spending account is a better option than the premiums on a critical illness policy. However, if you have difficulty saving or are the sole earner in your family, having a small premium deducted from your check to cover the cost of critical illness coverage can be a good option.