If you’re lucky, you’ve probably never had to use critical illness insurance. You’ve likely never even heard of it. But in the event of a big health emergency, such as cancer, heart attack or stroke, critical illness insurance could be the only thing protecting you from financial ruin. Many people assume they’re fully protected with a standard health insurance plan, but the exorbitant costs of treating life-threatening illnesses are usually more than any plan will cover. Read on to learn more about critical illness insurance and whether it's something you and your family should consider.

Critical Illness Insurance 101

As the average life expectancy in the United States continues to increase, insurance brokers are finding ways to make sure Americans can afford the privilege of getting older. Critical illness insurance was developed in 1996, as people realized that surviving a heart attack or stroke could leave a patient with insurmountable medical bills.

“Even with excellent medical insurance, just one critical illness can be a tremendous financial burden,” says CFP Jeff Rossi of Peak Wealth Advisors, LLC.

Critical illness insurance provides coverage if you experience one or more of the following medical emergencies:

  • Heart attack
  • Stroke
  • Organ transplants
  • Cancer
  • Coronary bypass

Because these illnesses require extensive medical care and treatment, their costs can outstrip a family’s medical insurance policy quickly. If you don’t have an emergency fund or health savings account (HSA), you’ll have an even harder time paying those bills out of pocket. 

Many people are now choosing high-deductible health plans, which can be something of a double-edged sword: Consumers benefit from relatively affordable monthly premiums, but could find themselves in a real pinch if a serious illness were to strike. (Read How High-Deductible Health Plans Work for more on costs and coverage.)

Critical illness insurance can pay for costs not covered by traditional insurance. The money can also be used for non-medical costs related to the illness, including transportation, child care, etc. Typically, the insured will receive a lump sum to cover those costs. Coverage limits vary – you could be eligible for a few thousand dollars all the way up to $100,000, depending on your policy. Policy pricing is impacted by a number of factors, including the amount and extent of coverage, the sex, age and health of the insured, and family medical history.

There are exceptions to critical illness insurance coverage. Some types of cancer may not be covered, while chronic illnesses are also frequently exempted. You may not be able to receive a payout if a disease comes back or if you suffer a second stroke or heart attack. Some coverage might end once the insured reaches a certain age. So, like any form of insurance, make sure to read the policy carefully. The last thing you want to worry about is your emergency plan.

Why It May Be Important

You can purchase critical illness insurance on your own or through your employer (many offer it as a voluntary benefit). Adding it on to a current life insurance plan may also save you money. 

One of the reasons companies have been keen to add these plans is that they recognize employees are worried about high out-of-pocket expenses with a high-deductible plan. Unlike other health care benefits, workers generally bear the entire cost of critical illness plans. That makes it a money saver for companies, as well as workers.

A big draw of critical illness insurance is that the money can be used for a variety of things, such as:

  • To pay for critical medical services that might otherwise be unavailable.
  • To pay for treatments not covered by a traditional policy.
  • To pay for daily living expenses, enabling the critically ill to focus their time and energy on getting well instead of working to pay their bills.
  • Transportation expenses, such as getting to and from treatment centers, retrofitting vehicles to carry scooters or wheelchairs, and installing lifts in homes for critically ill patients who can no longer navigate staircases.
  • Terminally ill patients, or those simply in need of a restful place to recuperate, can use the funds to take a vacation with friends or family.