Do I need critical illness insurance?

Critical illness insurance is more affordable than disability insurance, but it pays a very limited, one-time benefit. Disability insurance fully protects your income.

Critical illness insurance (CII) pays you a lump sum of money if you are diagnosed with a covered illness. This payout can be used to pay for anything you want, from mortgage payments to medical expenses or even just to take a vacation when you recover. Critical illness insurance can supplement your health insurance by paying for costs not covered by your health insurance, such as your deductible or out-of-network doctor costs.

Critical illness insurance is similar to disability insurance in that both pay out benefits if you experience a serious medical condition. With disability insurance, you receive a monthly benefit payment if you lose your income and can't work.

However, disability insurance benefits are typically much higher than those of critical illness insurance, as they are meant to replace your income while you're disabled. Benefits under CII max out between $10,000 to $50,000,

While critical illness insurance is more affordable than disability insurance, it could leave you without the coverage you need, and it has several preconditions that may prevent you from receiving the benefit or limit its amount. For that reason, disability insurance provides much more robust financial protection, especially since its coverage overlaps with that of critical illness insurance.

Read on:

What does critical illness insurance cover?

Each critical illness insurance policy usually specifies three categories of illness for which it will pay out. If your condition doesn't fit into one of those categories, you may not be eligible to receive the benefit. Furthermore, you may only be eligible for a partial benefit – usually 25% of the full benefit amount – if your condition isn't serious or life-threatening.

The three categories of critical illness coverage are:

1. Cancer

Cancer is one of the illnesses for which you can receive your full benefit amount, but only if the cancer is life-threatening. Less serious forms of cancer, including malignant tumors in situ, may only trigger a partial benefit payment. (Skin cancer, for example, is typically worth a payout of less than 3%.) If the cancer is caught early, you may not be eligible for any benefit at all.

2. Heart conditions

These include heart attack and stroke at the full benefit amount and coronary artery disease at a partial benefit. In some cases, you won't be eligible for a payout under this condition unless you're still alive after a certain number of days. For example, some insurers require you to wait 30 days before receiving the benefit for stroke.

3. Organ damage

Organ damage means complications resulting from a major organ transplant (excluding bone marrow) and kidney failure, both of which are usually paid out at the full benefit amount.

Other medical conditions

In many cases, the organ damage category is replaced by an "other" category that includes many different illnesses. While this category does expand your coverage, it's still limited to the injuries and illnesses listed in the category.

Frequent "other" medical conditions covered by critical illness insurance include:

  • Blindness
  • Deafness
  • Paralysis
  • ALS (Lou Gehrig's disease)
  • Lupus
  • Tetanus
  • Malaria
  • Sickle-cell anemia
  • Cystic fibrosis
  • Severe burns
  • Coma

What's not covered by critical illness insurance?

Critical illness insurance coverage will not pay out if your condition isn't serious. Chronic illnesses, like asthma or diabetes, are also typically not covered. You can usually only receive coverage for illnesses listed under your policy's narrow definition of critical illnesses.

You also need to show that you have a less favorable prognosis. If your cancer hasn't spread, for example, then it may not trigger a CII payout.

Additionally, pre-existing conditions are not covered by critical illness insurance. As with disability insurance exclusions, you can still purchase the policy, but if your pre-existing condition causes your illness, then you won't be eligible for the benefit.

Is critical illness insurance worth it?

Critical illness insurance may be good for people who don't need a lot of coverage and who can't afford disability insurance. On average, a young person paying for a $10,000 benefit may pay under $10 per month in premiums for coverage, and that's $10,000 in your pocket when you need it most. You likely won't have to pay taxes on the benefit if you paid your premiums with your after-tax income.

You also won't have to undergo a medical exam if you choose a low-enough benefit amount, which is called "guaranteed issue." Higher benefit amounts may require you to undergo a medical exam.

However, you may not need CII if you already have health insurance, which should already cover most of your medical expenses. You can use the critical illness insurance benefit to pay your deductible or for out-of-network services, but only if the illness happens to be covered by your policy. And if your health insurance comes with a flexible spending account (or a health savings account), that money can already be used to pay for those expenses.

You also may not need CII if you already have disability insurance. Your disability insurance coverage may overlap with your critical illness insurance coverage if the illness puts you out of work for an extended period. Because disability insurance replaces around 60% of your gross income, just a few months of disability insurance benefits may more than exceed even the maximum lifetime benefit from a CII policy.

But CII also may not be worth it for several other reasons:

You can only receive the full benefit once

Each category of coverage comes with a maximum benefit limit, after which the category closes for the remainder of the policy's lifetime. For example, if you receive a 25% partial benefit, you can only receive the remaining 75% for subsequent illnesses under the same category, even if the illness otherwise qualifies you for the full benefit. However, you can still receive the full benefit in other categories.

Your premium goes up as you age – and your benefits go down

Critical illness insurance policies are priced according to a schedule, which is written out in your policy. Your premium goes up every time you age into a new age range, as listed in the schedule, and some insurers even raise your premium every year. After a certain age, usually around 65, the insurer will cut your benefit in half, which is called the "age reduction schedule." Most CII policies expire when you reach age 70 or 75.

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Takeaway

Disability insurance replaces around 60% of your pre-tax income while you're disabled and can't work.

Disability insurance vs critical illness insurance

Disability insurance and critical illness insurance both provide benefits payments when you come down with a serious condition. They also have many of the same exclusions, such as for self-inflicted injuries or injuries caused while participating in a crime or fighting in a war. Both also have elimination periods you have to wait out before receiving your benefit payment.

Disability insurance also covers the same ground as critical illness insurance, although it's possible to qualify for the CII benefit but not the disability insurance benefit if you suffer a covered condition but aren't out of work for a long time.

However, while the critical illness benefit is helpful, you can get much more coverage from disability insurance, which means more peace of mind. To make sure you're getting the right amount of coverage, be sure to ask a licensed representative at Policygenius about the following advantages of disability insurance.

Disability insurance benefits last longer

The CII benefit is a lump-sum payment. Once you spend it, you don't get any more. But with disability insurance, you can continue receiving benefits as long as you remain disabled or until the benefits period ends. Under long-term disability insurance coverage, the benefits period could last even until you retire. Unlike critical illness insurance, you can select a longer benefits period when you take out the disability insurance policy.

Disability insurance benefits are much higher

Disability insurance is meant to replace your income when you can't work. That means monthly benefits payments that approximate the amount you'd usually get paid by your employer. You can choose a higher benefit amount when you purchase the policy, but it's not uncommon for higher-earning individuals to receive $5,000 per month under some of the most affordable plans.

Most critical illness insurance policies max out at a $50,000 benefit. While that's a huge sum to receive upfront, it doesn't provide long-term stability.

Disability insurance covers a wider range of illnesses

With critical illness insurance, you won't receive benefits unless your condition is specifically mentioned in the policy. But with disability insurance, you can receive benefits for virtually any condition as long as the condition causes you to lose work a long time, with the exception of any exclusions in your policy.

Critical illness rider for life insurance

If you have life insurance, it's possible to purchase a critical illness rider that functions just like a separate critical illness insurance policy. The rider pays a lump sum if you're diagnosed with a covered illness, such as cancer or kidney failure.

Illnesses covered by the critical illness rider include many of the same illnesses covered by the standalone CII policy.

It won't cost too much to add this rider to your life insurance, but don't expect a huge benefit either. Critical illness riders usually provide 10% of your death benefit, up to a maximum amount in excess of that 10% if you're willing to pay extra.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.