Q

Do I need critical illness insurance?

A

Most people don't need critical illness insurance. Disability insurance is more comprehensive and benefits last for longer.

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By 

Amanda Shih

Amanda Shih

Editor & Licensed Life Insurance Expert

Amanda Shih is an editor and a licensed life, disability, and health insurance expert at Policygenius, where she writes about life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

Updated April 14, 2022 | 5 min read

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Critical illness insurance pays you a lump sum 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. Critical illness insurance can pay 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. Critical illness insurance typically costs less than disability insurance, but disability benefits are much higher and can be easier to qualify for.

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What does critical illness insurance cover?

Each critical illness insurance policy 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 amount — if your condition isn't serious or life-threatening.

The three categories of critical illness coverage are:

  1. Cancer: You'll receive your full benefit amount if your diagnosis life-threatening. Less serious cancers, including malignant tumors in situ, may only trigger a partial benefit payment. If the cancer is caught early, you may not be eligible for any benefit at all.

  2. Heart conditions: Insurers pay full benefits for heart attack and stroke and a partial benefit for coronary artery disease. In some cases, you won't qualify for benefits if you survive a certain number of days after your medical event.

  3. Organ damage: This covers 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:

  • ALS (Lou Gehrig's disease)

  • Blindness

  • Coma

  • Cystic fibrosis

  • Deafness

  • Lupus

  • Malaria

  • Paralysis

  • Severe burns

  • Sickle-cell anemia

  • Tetanus

What is 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 critical illness 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. 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 take a medical exam if you choose a low-enough benefit amount.

However, you may not need critical illness insurance if you already have health insurance, which should already cover most of your medical expenses.

You also may not need critical illness 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.

→ Learn about disability insurance and cancer

Critical illness insurance 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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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.

However, while the critical illness benefit is helpful, you can get much more coverage from disability insurance, which means more peace of mind.

Disability insurance benefits last longer

The critical illness benefit is a lump-sum payment. Once you spend it, you don't get 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.

→ Learn about how long disability lasts

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 large sum to receive upfront, it doesn't provide long-term stability.

→ Learn how much disability insurance pays

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.

If you're looking for disability coverage, a licensed agent at Policygenius can help you find an affordable plan that suits your needs.

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 critical illness 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.

Frequently asked questions

What does a critical illness plan cover?

Critical illness plans, also known as dread disease plans, only cover you if you have cancer, heart conditions, organ damage, or other severe medical conditions, like ALS.

How much does critical illness insurance pay out?

Critical illness insurance pays out a lump sum benefit and policies usually max out at $50,000. There are no more benefits after you receive your payout.

What is the difference between critical illness insurance and health insurance?

Critical illness insurance covers major medical conditions, while health insurance can provide a broader range of coverage, including preventive care. Critical illness plans can supplement health insurance plans but should not replace them.