Is taking out critical illness insurance worth it?

Data gathered by the American Heart Association (AHA) in 2019 has shown that about 720,000 people in the country experience a heart attack each year, while one person suffers a stroke every 40 seconds. Figures from the American Cancer Society, meanwhile, indicate that both men and women in the US have a 33% chance of developing some form of cancer.

Surviving a critical medical condition, however, also presents its share of challenges. Several studies have revealed that treatment and recovery often come with exorbitant medical expenses that can leave many Americans in serious financial turmoil.

2019 research published by the American Public Health Association (APHA) has found that medical issues, including the inability to pay hospital bills, were the cause of about two-thirds of all bankruptcies in the US. This is despite the implementation of the Affordable Care Act (ACA).

Prior to this, a survey conducted by the Kaiser Family Foundation and the New York Times revealed that more than a quarter, or 26%, of US adults struggled to pay medical bills, with about one million declaring bankruptcy every year due to insurmountable medical expenses.

One major contributing factor to the issue is the assumption most people have that a standard health insurance plan can provide full protection. In reality, however, the cost of treating life-threatening illnesses is often more than a traditional health plan can cover.

According to the Kaiser survey, unexpected refusal of an insurance provider to pay for a medical procedure is the most common cause of medical debt. This is where critical illness insurance comes in handy. This supplementary insurance product pays for out-of-pocket medical expenses that traditional health insurance does not cover.

Read more: Top 8 critical illness insurance providers in the US

How does critical illness insurance work?

Most critical insurance policies pay out a lump sum that the policyholder can use to replace lost wages or pay for treatment-related costs. The payout can also be used for specialty medications and non-medical expenses, including mortgages and groceries. Some insurance providers also give the policyholder the option to take monthly payouts that they can use while recovering.

The table below provides a summary of how different medical and health-related coverages compare with critical illness policies.

Policy

Coverage

Underwriting

Price determinants

Critical illness insurance

Treatment and recovery costs from severe illnesses

Not required, except for a yes-no questionnaire to record any pre-existing conditions; higher amounts of coverage, however, may be subjected to full underwriting

Person’s overall health standing and habits, including age, gender, medical history, and smoking status; and key policy features such as term length, type of coverage, number of illnesses covered, and add-ons

Health insurance

Full cost of medical treatment and procedures

Typically not required because of the Affordable Care Act

If purchased through the ACA’s health insurance marketplace, premiums are based largely on how much the policyholder earns; if taken out through private insurers, pricing is based on a range of factors, including size of family, deductible, and coverage options

Disability insurance

Portion of income if the policyholder is unable to work due to injury or illness

Full underwriting required

Between 2% and 6% of the monthly benefit amount

Life insurance

Pays out a lump-sum benefit for most causes of death

Applicants are required to fill out a questionnaire about their health and habits, and undergo a medical exam

Age, health, and lifestyle factors, including smoking habits

Critical illness insurance typically has an effectivity date of 90 days after the policy’s purchase. Limits and exclusions often include a 12-month waiting period if the policyholder has a pre-existing condition at the time the insurance was bought.

What does critical illness insurance cover?

There is no universal list of covered conditions under critical illness plans as coverage varies depending on the insurance provider. Some medical conditions and procedures that policies cover include:

Accidental brain damage
Amputation
Angioplasty
Arthritis
Cancer
Coma
Connective tissue disorders
Coronary bypass
Dementia
Heart attack
Kidney failure
Loss of vision or hearing
Multiple sclerosis
Organ transplants
Paralysis
Parkinson’s disease
Severe burns
Stroke

In terms of exclusions, most critical illness policies do not cover chronic conditions or those that were diagnosed within the past year. Some policies also do not provide coverage for non-invasive cancer. Insurance companies do not pay out benefits for injuries resulting from self-harm or sustained while engaged in illegal activity. Some policies may also end coverage or charge higher premiums once the insured reaches a certain age.

How much does critical illness insurance cost?

Just like other types of insurance policies, several factors impact the cost of critical illness coverage. These factors can be grouped into two categories:

Lifestyle factors: Comprise a person’s overall health standing and habits, including age, gender, medical history, and smoking status

Policy factors: Consist of key policy features such as term length, type of coverage, number of illnesses covered, and add-ons

In addition, insurance rates can vary by state.

Read more: Top 10 health insurance companies in the US

Below are sample calculations from specialist insurtech Breeze of the estimated monthly premiums for a woman from Eugene, Oregon and a man from Savannah, Georgia broken down by age, benefit amount, and smoking status.

Female from Eugene, Oregon

Age

Smoking status

$5,000 benefit

$25,000 benefit

$50,000 benefit

$75,000 benefit

25 years old

Non-smoker

$4.77

$10.16

$18.14

$26.13

Smoker

$5.16

$17.08

$32.98

$47.88

35 years old

Non-smoker

$5.34

$18.02

$34.86

$50.70

Smoker

$8.01

$31.35

$61.52

$90.69

45 years old

Non-smoker

$8.68

$30.71

$57.25

$85.79

Smoker

$12.29

$53.75

$103.33

$154.90

55 years old

Non-smoker

$11.35

$48.05

$94.93

$140.81

Smoker

$19.12

$87.91

$172.66

$256.40

Source: Breeze Insurance

Male from Savannah, Georgia

Age

Smoking status

$5,000 benefit

$25,000 benefit

$50,000 benefit

$75,000 benefit

25 years old

Non-smoker

$4.07

$12.64

$21.72

$31.56

Smoker

$6.57

$19.17

$36.16

$53.16

35 years old

Non-smoker

$6.03

$21.46

$50.01

$60.04

Smoker

$9.21

$37.36

$73.55

$108.74

45 years old

Non-smoker

$10.76

$25.94

$78.07

$116.01

Smoker

$16.10

$72.82

$141.47

$211.12

55 years old

Non-smoker

$17.78

$75.20

$148.22

$221.25

Smoker

$29.24

$138.52

$273.86

$408.21

Source: Breeze Insurance

Is taking out critical illness insurance worth it?

According to Breeze, taking out critical illness insurance is beneficial, especially for those who have a family history of expensive medical conditions and do not have a reliable financial safety net.

“If you’re fortunate, you’ll never need to use your critical illness coverage. In that event, having a return of premium rider on your policy can even get you some of your money back. But if you do, you’ll have a stronger financial safety net to fall back on,” the Nebraska-based insurtech firm wrote on its website.

But consumer information website Healthinsurance.org noted that critical illness plans “are not regulated by the ACA and are not suitable to serve as a person’s only medical coverage.”

“As long as you understand the details of your coverage and are using it to supplement a comprehensive health insurance plan, a critical illness plan might be a good fit for your needs,” the group said.