What Is Critical Illness Insurance?

Critical illness insurance provides you with a lump-sum payout when you are diagnosed with a specific severe illness, like a stroke, heart attack or cancer. Designed to alleviate financial burdens during an unexpected health crisis, this insurance can be used to supplement health insurance or everyday expenses.

Read to understand the pros and cons of this coverage and the cost of critical illness insurance.

Key Takeaways When you suffer your first covered illness, you are entitled to an initial benefit up to 100% of the coverage amount you purchased. For each subsequent illness you suffer within the term period, you may receive subsequent payments that are a percentage of your initial benefit. Covered conditions include cancer, heart attack, stroke, organ transplants, multiple sclerosis and kidney failure. Premiums for critical illness insurance can be as low as $12 per month. Coverage limits vary, ranging from $10,000 to $100,000 in some plans.

How Critical Illness Insurance Works?

When you are diagnosed with a specific illness or condition, critical illness insurance will issue you a lump-sum payment once you’ve filed a claim. The payment amount is usually a percentage of whatever coverage limit you purchase and the money is paid directly to you and can be used for whatever you want.

For example, if you suffer a heart condition and you buy $50,000 of coverage, your policy may pay you 50% of the limit, or $25,000. Your critical illness insurance can then be used in tandem with your health insurance and can be an effective way to supplement your existing coverage.

Coverage limits can vary with some plans having a limit of $10,000 while others may have a limit as high as $100,000.^[1] In addition, there is no requirement for you to spend your claim payout on medical treatment, meaning it can go to paying your mortgage, bills, debts and more.

How Many Times Can You Use Critical Illness Insurance?

Critical illness insurance comes with multiple payouts. The first is an initial payout, covering a particular ailment, such as a stroke, heart attack, various cancers or coronary artery bypass graft. If you have a second stroke or other covered condition, your critical illness would provide a one-time recurrence benefit based on a percentage of your initial benefit.

Your plan may offer a recurrence benefit of up to 50% of your initial benefit for conditions like heart attack, various cancers and coronary artery bypass graft.^[2] This benefit is only accessible if an initial benefit for the condition has been paid.

A pause can exist between your initial benefit and recurrence benefit known as a benefit suspension period wherein you will receive no payouts.

Below is a table showing examples of percentage payouts for critical illness insurance.^[2]

Covered Condition	Initial Benefit	Recurrence Benefit
Full benefit cancer	100%	50% of initial benefit
Partial benefit cancer	25%	12.5% of initial benefit
Heart attack	100%	50% of initial benefit
Stroke	100%	50% of initial benefit
Coronary artery bypass graft	100%	50% of initial benefit

What Does Critical Illness Insurance Cover?

The exact conditions covered by critical illness insurance can vary by provider and policy but commonly covered conditions include:

Cancer	Heart attack	Stroke
Coronary artery bypass surgery	Major organ transplant	Multiple sclerosis
End-stage renal failure	Heart valve replacement	Coma
Kidney failure	Paralysis	Sudden cardiac arrest
Loss of hearing	Loss of speech	Loss of vision

What Isn't Covered?

Critical illness insurance typically doesn't cover asthma, diabetes, injuries from illegal acts, substance abuse, war or self-inflicted injuries. In addition, external physical injuries such as cuts, bruises and dismemberment are excluded from coverage. While pre-existing conditions might be excluded, some policies cover them after a waiting period, such as a year.

Who Is Critical Illness Insurance Best For?

Critical illness insurance is valuable for those with high-deductible health insurance plans as the payout can help cover any out-of-pocket costs.

Critical illness insurance is also ideal for those who want to safeguard their finances against the high costs associated with treating severe health conditions (e.g., cancer, heart attack, stroke). This type of insurance is particularly beneficial for those who have a family history of critical illnesses or are at a higher risk due to lifestyle or other health factors.

It is also recommended for people who may not have substantial savings or a robust emergency fund. The lump sum payment it provides can be useful for covering medical expenses, mortgage payments or even daily living costs during a time of health crisis.

Additionally, critical illness insurance can be a strategic choice for those who are the primary earners in their family and want to ensure that their loved ones have some financial stability while they are recovering.

Is Critical Illness Insurance Different Than Accident Insurance?

Accident and critical illness insurance are two separate types of coverage. Whereas critical illness generally offers a payout due to a medical diagnosis, accident insurance covers physical harm caused to an individual due to an outside event.

For example, if someone loses their ability to hear due to meningitis, critical illness insurance may pay out and accident insurance wouldn't. If that same person lost their hearing due to an industrial explosion, accident insurance would step in and pay and critical illness wouldn't.

How Much Does Critical Illness Insurance Cost?

Critical illness insurance premiums are generally more affordable than health insurance. For instance, a healthy 35-year-old non-smoking male can get coverage from Liberty Mutual for as low as $12 a month for a $30,000 payout.^[3] Premium costs depend on factors like age, health, smoking status, location and the insurance provider.

Pros and Cons of Critical Illness Insurance

While critical illness insurance is a cheap way to get coverage, it has drawbacks. The table below weighs the advantages and disadvantages of critical illness coverage.

Pros	Cons
Lump sum payment	Limited coverage
Versatile payout	Coverage has a shelf life
Low premiums	Restrictive conditions

Pros

• Lump sum payment: The amount you receive is already predetermined based on the type of illness and not on how much medical expenses you rack up. As a result, you do not have to worry about a smaller claim payout if your medical bills are on the lower side.
• Versatile payout: There is no requirement for you to spend your claim payout on certain expenses, like paying for your medical bills or for home care.
• Low premiums: Critical illness insurance costs are typically lower than health and life insurance policies.

Cons

• Limited coverage: Certain types of ailments are excluded from critical illness policies.
• Coverage has a shelf life: Critical illness coverage is typically included in term life insurance policies, meaning they tend to last anywhere from one to 30 years.^[4]
• Restrictive conditions: A doctor must verify you have an approved condition or illness before a payout occurs.

How To Get Critical Illness Insurance

There are two ways to get critical illness insurance. The first is as a rider through a life insurance policy. In fact, you may already have life insurance with critical illness insurance already included and you’ll want to double-check your policy.

The other way to get critical illness insurance is by purchasing a separate policy. When shopping for critical illness insurance, getting several quotes from different carriers is advisable. Insurance companies will request information about you, such as your age, medical history, lifestyle and sometimes even your family's family's medical history. However, providing this information for each carrier can take time and effort.

Fortunately, using an insurance marketplace like SmartFinancial can simplify the process. Fill out a questionnaire about your health, coverage needs and budget just once and you can get paired with an agent who can walk you through your coverage needs. Just enter your zip code to begin the process!