Critical Illness Insurance: Should You Be Covered?

When we hear the word “insurance” most of us tend to associate the term with more popular options like car or health insurance. Critical illness insurance most likely isn’t one of the types of insurance that comes to mind.

It makes sense—we often don’t want to think about the scarier health-related risks in life—especially not critical illness.

Unfortunately this inclination to turn away also often leaves us vulnerable and unprotected should we be diagnosed with a critical illness.

The reality is by the time we reach retirement age, one out of every four of us will be out of work due to illness or injury for longer than our accrued paid time off allows.

What Counts as a Critical Illness?

Illnesses can happen to any of us, at any time. They might be simple like a cold, or one of the several critical illnesses that affect Americans.
The three major critical illnesses are:

Cancer
Heart attack
Stroke

Other critical illnesses can include:

Blindness
Multiple sclerosis
Organ transplants
Kidney failure
Paralysis
Heart valve replacement

According to The American Association for Critical Illness Insurance , statistics show annually:

Some 1.4 million Americans are diagnosed with cancer.
Every 40 seconds someone in the US has a stroke. 600,000 people will experience their first stroke.
Every 34 seconds, an American will suffer a heart attack. 785,000 will have a new coronary attack.
1.5 million Americans will declare bankruptcy this year. 60 percent are due to medical bills (up 50 percent over 6 years).

These numbers are alarming and that’s why protecting your income with disability and/or critical illness insurance is so important.

Naturally, when we’re unfamiliar with certain types of insurance, many questions come to mind:

Why do I need critical insurance?
If I already have disability insurance should I get critical illness insurance as well?
Which one is the best option?

Let’s start by explaining the difference between critical illness and disability insurance.

What is Critical Illness Insurance?

Critical illness insurance pays you a lump-sum cash amount if you are diagnosed with any one of the critical illnesses covered by your policy, even if you make a full recovery.

What is Disability Insurance?

Disability insurance on the other hand pays you a regular payout when you’re ill or hurt and can’t work.

It protects your income from the very real possibility you’ll become disabled for a period of time during your career, whether due to injury or illness.

Differences Between Critical Illness Insurance and Disability Insurance

There are several differences between critical illness and disability insurance.

Income Protection: Critical illness insurance is meant to provide you a source of income to pay for your health costs if you are diagnosed with a critical illness while disability insurance is meant to pay a portion of your income in the event that you cannot work.

Frequency of Payment: Critical illness insurance generally provides you a lump sum payment as specified in the policy while disability insurance pays you a monthly benefit, usually a percentage of what you earned before becoming disabled.

Qualification of Benefits: Critical illness benefits depend on the diagnosis of one of the policy-listed illnesses while disability insurance benefits rely on your inability to work.

Tax Implications: Critical illness gives you a lump sum tax free cash payout while disability coverage is calculated as a percentage of your after tax income and is paid for a certain amount of time.

Requirement of Proof Of Loss: Critical illness insurance generally doesn’t require any ongoing proof of loss of income, and is not affected by any other income you make while disability insurance requires ongoing proof of loss of income. Disability insurance payments can stop when you go back to work and start earning income.

Which Critical Illness Policy Is Right For You?

Each critical illness policy has specific terms and conditions, which must be reviewed very carefully.

Make sure you understand which types of illnesses are considered critical and will qualify for payment. If your diagnosed illness is not included on the policy list, your claim may be denied by the insurance company.

Also, be aware of the survival period of your policy. Critical illness policies typically have a survival period, or waiting period, This is a period of time which specifies how long you must wait after you’ve received your medical diagnosis to collect the lump sum benefit from the insurance company. This period can vary from one policy to another.

Be sure to ask all your questions before buying a critical illness policy. This is where an insurance agent can be a valuable resource. They can help you understand the language in your policy, explain the specific terms and conditions, and guide your decision around which critical insurance policy is right for you.

About Council for Disability Awareness

Council for Disability Awareness has written 478 posts in this blog.

The Council for Disability Awareness is a nonprofit organization dedicated to educating the American public about the risk and consequences of experiencing an income-interrupting illness or injury. The CDA engages in research, communications, and educational activities that provide information and helpful resources to wage earners, employers, financial advisors, consultants, and others who are concerned about the personal and financial impact a disability can have on wage earners and their families.