Are critical illness insurance policies right for you?

  • By Chris Taylor,
  • Reuters
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It is annual enrollment time for company benefits in the United States, and for many employees, the process can be as perplexing as deciphering ancient cuneiform tablets.

Well, now there is something else you have to figure out: “Critical illness” insurance coverage. Basically a voluntary add-on to your major healthcare plan, it has been showing up as an option on more and more benefits menus. In 2019, 62% of large firms offered it, up sharply from 46% just two years prior, according to an employer survey by the Kaiser Family Foundation.

Critical illness policies provide lump-sum payments in the event of a serious health diagnosis, typically cancer or heart attack or stroke. So, in exchange for monthly premiums in the region of $25-$50, you could be eligible for a potential benefit such as $10,000 or $15,000 or $25,000, depending on your particular policy.

The obvious question: Doesn’t my comprehensive health plan already cover “critical illness”? Well, yes – to an extent.

But if you are in a high-deductible plan, for instance, you are responsible for out-of-pocket costs. For the 2021 plan year, the Affordable Care Act limits out-of-pocket expenses for marketplace plans at $8,550 for individuals, or $17,100 for families.

A critical-illness plan could help bridge that gap. The lump sum can also cover any manner of non-medical expenses, including your mortgage or rent if your health condition hampers your ability to work.

“These ancillary products are marketed to wrap around your major medical plan, as deductibles have risen,” says Sabrina Corlette, co-director of the Georgetown University’s Center on Health Insurance Reforms.

A key consideration, Corlette adds, is knowing the “medical loss ratio,” which reflects the percentage of premium revenue that insurers pay out in claims,

In the group market, that loss ratio for specific disease policies is 40.77%, according to the 2019 Accident and Health Policy Experience Report from the National Association of Insurance Commissioners. That means for every dollar insurers are taking in, they only pay out a little more than 40 cents.

“Policies for specific diseases are not necessarily a bad idea, since many expenses are not covered by traditional policies,” says Tim Jost, an expert in health law and professor emeritus at Washington and Lee University. “But research shows that most people overestimate their likelihood of getting cancer, which explains why payouts are pretty small.”

That being said, these policies are one additional line of defense against situations like medical bankruptcy.

A few issues to consider, if a “critical illness” option pops up in your annual enrollment documents.

What exactly is covered?

There are a number of different flavors of critical illness policies, which will affect the size of your monthly premiums. You might encounter a cancer-only option; or one that covers a handful of common health events, like cancer, heart attack and stroke; or a much broader one that might address 10 or 20 different conditions, sometimes even Covid-19 in newer offerings.

Keep in mind that if you have an existing cancer diagnosis, as an example, you cannot just take out a big policy and get an immediate payout.

What are the alternatives

Critical illness policies address a couple of underlying issues. One is anxiety about high deductibles, and how you will cover them if you run into serious health problems. Another way to address that same worry is to pay a bit more for a primary healthcare plan with a lower deductible, suggests Jost.

You could also look to vehicles like a health savings account, to which you could contribute pre-tax dollars, and to which your employer might chip in.

If you are worried about a loss of income, a disability policy might be the better path to consider, covering a percentage of your salary for an extended period of time.

What else should I know?

Monthly premiums will be higher the older you are, when serious health diagnoses like heart attacks or strokes become much more common. At a certain point, it may be difficult to secure coverage at all.

Remember that in no circumstances should critical illness policies be considered an alternative to a comprehensive healthcare plan, Jost says.

“Just be aware that there can be high commissions for ancillary products like this,” says Georgetown’s Corlette. “If you are working with an insurance broker, ask them to be transparent about what they are receiving for selling these policies.

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