Medical expenses can be steep when you have a critical illness. Photo: TaxRebate.org.uk via Flickr.
If you're carrying health insurance, you may think all potential healthcare expenses are covered -- or at least that you've done all you can do. However, you might want to look into critical-illness insurance.
First, though, a pop quiz. What's the No. 1 cause of personal bankruptcy filings? Credit card debt? Unmanageable mortgages after job losses? Gambling excesses? Nope, nope, and nope. It's medical bills. The folks at NerdWallet.com have estimated that households containing about 1.7 million people filed for bankruptcy protection in 2013 because of steep medical costs -- often tied to a serious illness. Many other people with massive medical bills may avoid bankruptcy, but only by wiping out their savings and/or retirement funds.
What critical-illness insurance is and does
That's why critical-illness insurance exists -- to cover the often major costs of serious illnesses. It's relatively new, having been launched in 1996, but it's growing in popularity. You can often buy it through your employer -- about a third of employers recently offered it, and the percentage is growing year to year -- or on your own. (You may even be able to add it as a rider to an existing life-insurance policy.) It's estimated that about 1 million Americans are now covered by critical-illness insurance.
Photo: Flickr user Sohel Parvez Haque.
Different policies will cover different diseases and conditions, and they'll have different terms. Commonly covered diagnoses include cancer, heart attacks, strokes, major organ failure, end-stage heart failure, coronary artery bypass disease, Alzheimer's disease, deafness, blindness, benign brain tumors, severe burns, paralysis, comas, and more. If you buy a family plan, then there will probably be other conditions included, such as cerebral palsy, cystic fibrosis, type 1 diabetes, complex congenital heart disease, and muscular dystrophy.
A critical-illness insurance payout can be used in any way you wish, whether that's to cover your medical expenses, to pay your mortgage while you're out of work, or even to buy a new car.
Compared to long-term-care insurance and disability insurance, critical-illness insurance can seem quite reasonably priced. You can get coverage that will pay out a lump sum that ranges from $10,000 to $1 million. For many people, a little will go a long way. Here's what several different kinds of people might expect to pay each year for a $30,000 lump-sum benefit, according to the American Association for Critical Illness Insurance:
- 45-year-old man, non-smoker: $570 to $605
- 45-year-old man, smoker: $980 to $1,020
- 45-year-old woman, non-smoker: $420 to $460
- 45-year-old woman, smoker: $710 to $750
- 55-year-old man, non-smoker: $880 to $915
- 55-year-old man, smoker: $1,495 to $1,530
- 55-year-old woman, non-smoker: $570 to $610
- 55-year-old woman, smoker: $950 to $995
There's typically no medical exam required for low-value policies, but if you want a policy with a big payout -- say, more than $100,000 -- your medical history and perhaps your family history will be examined.
Surgery for a critical illness can be alarmingly expensive. Photo: Flickr user Phalinn Ooi.
What critical-illness insurance doesn't do
A critical-illness insurance policy isn't likely to serve all your needs, but it can be a great help. Most policies will only pay out once if you're hit with a covered diagnosis. But you can get policies that will pay you some more upon a recurrence or a second diagnosis.
Your coverage can also change over time: Many policies will reduce your expected payout as you grow older, and some even terminate once you hit a certain age. You can often get rid of such terms by paying steeper premiums.
Note, too, that in some cases, such as less serious cancers that are found early, you won't qualify for a payout -- or you might get a partial one. Chronic illnesses are also excluded, such as type 2 diabetes.
Do you need critical illness insurance?
With the Affordable Care Act in place, the need for critical-illness insurance is smaller -- though it can still be well worth considering. The ACA has set maximum out-of-pocket expenses for health insurance plans sold through its marketplaces. For 2015, they're $6,600 for an individual and $13,200 for a family plan. You can still incur higher costs with some other plans, especially if you use the services of providers outside your plan's network. And remember that many people would have a lot of trouble coughing up the maximum out-of-pocket sums.
So it's worth thinking about how much extra money you might need should you fall ill and be unable to work while incurring huge medical expenses. Providers of critical-illness insurance suggest that buying a policy will cover two years of your mortgage payments, plus about $5,000 for medical expenses not covered by your regular insurance.
You may be able to protect yourself financially in other ways, though. For example, you could stockpile funds in a health savings account if you qualify to do so. (In 2015, you can contribute up to $3,350 to an HSA, or $6,650 for families.) However, note that the money in these plans can only be used for qualified healthcare costs -- not for paying your mortgage while an illness keeps you out of work.
You could also simply set up a separate fund for health-related emergencies, contributing money to it regularly until it's as large as you need it to be.
At the very least, it's smart to give some thought to how you would handle a costly medical setback. One possibility is critical-illness insurance.
