By Richard A McGrath, CIC, LIA
Sometimes health insurance just isn’t enough, especially to cover the costs of a critical illness. The three most common critical illnesses that Americans suffer from are cancer, heart attack, and stroke. When an illness strikes a family member, gaps in coverage often result in out-of-pocket expenses that can add up to thousands of dollars.
Even if you have adequate health insurance, you will still be responsible for paying any deductibles and co-payments. Additionally, certain prescriptions may not be covered by your policy, or you may decide to seek alternative treatment that isn’t covered, or treatment from an out-of-network medical center.
While you are recovering you may also need to replace your income so that your mortgage and other bills can still be paid. However, your disability insurance may also have gaps. Group disability protection typically covers 60 percent of income and, if the employer paid the premiums, the benefits may be taxable. You also may not be disabled for enough consecutive days to be considered eligible for a disability claim.
An analysis by Sun Life Financial of its insurance claims found that the average out-of-pocket medical cost for critical illnesses is $7,575. In many cases it is much higher; the out-of-pocket cost for heart attacks, for example, averages $14,234.
Given those numbers, it may not be a surprise that about 60 percent of all U.S. bankruptcies stem from medical costs – and 78 percent of that number are people with health insurance, according to the American Association for Critical Illness Insurance (AACII).
The Affordable Care Act and other regulations, the cost of developing new medical care, and other factors have dramatically increased the cost of healthcare. Medical advances are keeping more patients with critical illnesses alive – but at a high cost.
Costs continue to rise and, as they do, employers are shifting more of the burden onto employees, according to MarketWatch. Employees now pay nearly 37 percent of healthcare costs, including premiums and out-of-pocket costs, according to a survey by Towers Watson and the National Business Group on Health.
Being diagnosed with a critical disease is difficult enough, but finding out that your health insurance doesn’t fully cover your care can be tragic. That’s why it’s worth considering critical illness insurance.
Critical illness insurance provides a tax-free lump-sum or ongoing payment if the insured develops a critical illness such as cancer, a heart attack, renal failure or Alzheimer’s disease. Coverage may also include bypass surgery, major organ transplants, heart valve replacement, surgery of the aorta, and treatment for paralysis, loss of sight or multiple sclerosis, according to the AACII.
Critical illness insurance was first introduced in the United States during the mid-1990s and today covers an estimated 600,000 Americans. The industry has $11.5 billion worth of in-force benefits.
How to Buy Critical Illness Insurance
You can purchase critical illness insurance through your independent insurance agent or you may be able to add it as a rider to your life insurance policy.
You may also be able to purchase it through your employer; group policies cost less, but may not deliver the level of coverage you need. About 35 percent of large and midsize companies offer critical illness coverage, according to a Towers Watson survey. Some employers may offer a “guaranteed issue” policy, which means even individuals at high risk can qualify, but as a result the costs may be higher for healthy employees.
Critical illness protection typically is relatively inexpensive, but premiums will vary based on your age and your health when you apply, your gender, whether you are a smoker, and the extent of the coverage you’re seeking. Most individual policies offer benefits of $10,000 to $50,000, but coverage can range from $5,000 to $1 million.
Many policies have a waiting period after diagnosis before you can receive payment known as the survival period, riders that must be purchased, and limitations on pre-existing conditions. Some policies will pay only a single claim, while others will pay multiple times if you have more than one critical illness.
Some employer policies have age reduction schedules, with payouts declining as the policyholder ages. Employer policies are usually portable if the employee switches jobs, retires, gets laid off or is fired, but it’s important to be certain that’s the case. Individual policies, of course, are always portable.
Most policies are guaranteed renewable, which means the policy cannot be canceled even if your health status changes, but be certain that this is the case before making a purchase. Also be certain to purchase your insurance from a carrier that has a good reputation and good rating. If the insurer is not in good financial condition, your coverage may not be available when you need it.
Once you’ve purchased critical illness insurance, your rates will typically be guaranteed for a few years – generally, three to five years. After that period, the insurance carrier may apply to the state insurance commissioner for a rate increase, but any increase must be justified.
Alternatives to critical illness insurance include cancer insurance, self-insuring, and creating a tax-advantaged flexible spending account (FSA) or health savings account (HSA). Cancer insurance costs less than critical illness insurance, but it offers very limited coverage. If you have an illness other than cancer, it will pay nothing.
If you are a good saver, you may be able to self-insure against a critical illness, but few people have that much discipline. Saving through an FSA or HSA is a better option, given the tax advantages.
Flexible spending accounts, which are offered by many employers, allow employees to pay for eligible out-of-pocket healthcare and dependent care expenses with pre-tax dollars. Health savings accounts are tax-advantaged medical savings accounts available to taxpayers enrolled in high-deductible health plans. Funds contributed to health savings accounts are not subject to federal income tax at the time of deposit.
Be sure you understand any restrictions before deciding to purchase critical illness insurance. Review the critical conditions that are covered and have a clear understanding of what’s excluded from your policy. You should explore all coverage options with your independent agent before making a final decision.
Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass. He can be reached at email@example.com.
This article is written for informational purposes only and should not be construed as providing legal advice.