Should you get critical illness insurance?
If you fall victim to a stroke, heart attack, cancer or another type of critical illness, the costs to yourself and your family can be crippling, even if you have health insurance. According to a study from NerdWallet Health, a site that helps consumers compare healthcare costs, about 1.7 million people file for bankruptcy because of unpaid medical bills each year.
And out of the Americans with some level of health insurance, 10 million people have medical bills they can't pay.
Why does this happen? Many Americans have plans with high deductibles: For instance, under Anthem's plans in Maine, policyholders may have deductibles of as high as $12,000, in which they will need to pay all out-of-pocket medical costs before all health claims are paid by the insurer.
And some plans impose caps on what can be covered, such as restricting coverage for pregnancy-related conditions (although such exceptions will no longer be legal under the Affordable Care Act, which will go into full effect in 2014). Additionally, a serious illness can lead to financial instability due to loss of work income, treatment-related travel expenses and other unexpected factors, such as the need to pay for childcare or household assistance.
"Medical bills can completely overwhelm a family when illness strikes," says Christina LaMontagne, vice president of health at NerdWallet.
Should you get critical illness insurance?
Critical illness insurance aims to fill the gaps by giving families immediate access to cash at a time when they need it most.
Individuals who purchase critical illness insurance policies can claim a benefit if diagnosed with a serious illness defined within the policy's coverage terms, which may include various types of cancer, stroke, heart attack and other serious, life-threatening illnesses.
Such plans typically pay a lump-sum amount: For instance, under a typical plan, a 32-year-old woman in Atlanta would pay approximately $240 per year in order to collect a $20,000 lump-sum benefit if diagnosed with cancer, says Alex Forrest, a health insurance broker in Greenville, S.C. Other plans pay out according to a schedule of benefits, in which you can collect a specified amount of money for each day you receive chemotherapy, for example.
Regardless of the payout schedule, you don't need to use the funds specifically for paying your medical bills. "It's your money," Forrest says. "A lot of times, people use the benefit to pay expenses such as their rent or mortgage, which they wouldn't have the money for otherwise."
Is critical illness insurance a good investment?
In most cases, this type of insurance isn't a great investment compared to a comprehensive health care plan, but there are possible exceptions.
"The most important thing that anyone can do is to have a comprehensive major medical policy that covers these same types of illnesses that a 'critical illness only' policy will cover, but with much higher limits than critical illness coverage, which has capped benefits that could be as low as $10,000, says Joel Ohman, a certified financial planner professional in Tampa, Fla. "There may be some instances where an additional critical illness insurance policy might be needed to combine with a major medical policy, but those situations are few and far between."
Forrest says he typically recommends such plans to individuals who have very high deductibles on their health insurance policies, or don't have disability insurance coverage to help them cover loss of income if they are seriously ill. Additionally, "for people with a family history of cancer or heart attack, purchasing such a policy may help them alleviate stress and worry," he says.
Such policies can still be helpful in some cases after the new plans through the health insurance exchanges are available in October 2013. Although from 2014, individual out-of-pocket spending will be capped at $6,350 per person under the Affordable Care Act, people who believe they have a high chance of diagnosis with a specific illness may still wish to buy a critical illness policy.
Does a critical illness policy cover all serious illnesses?
There are many expensive chronic illnesses that aren't considered immediately "life-threatening," and wouldn't be covered by a critical illness insurance policy, such as diabetes. If you're diagnosed with such a disease, you would still need to pay all of the associated costs, either through your health insurance policy or out of pocket if you don't have health insurance.
Even if a critical illness insurance policy seems like a good idea in your circumstances, it's possible you won't qualify for the insurance in the first place. "You don't have to be running triathlons, but you should be in reasonably good health," Forrest says. "Someone who weighs 400 pounds, or someone who has already had cancer in the past, most likely wouldn't qualify for the insurance." Forrest says that physical examinations aren't typical, but the insurer would look at past medical records to analyze the potential customer's risk.
For most people, the best strategy is to purchase the best health insurance policy that you can comfortably afford. "Pay out of pocket what you can afford to fix or replace; insure what you can't, and do so in the most cost-efficient way possible," says Rob Drury, executive director of the Association of Christian Financial Advisors.
Your health insurance premiums are tax-deductible and, starting in 2014, may be subsidized according to your household income. Critical illness insurance policies are not eligible for federal subsidies, and people who receive benefits may also be required to pay tax on their benefit, according to Forrest.