Critical illness insurance is a type of supplemental disability insurance that pays a lump sum benefit for certain serious illnesses. You can use your benefit to pay for anything you need, it doesn’t have to be related to your medical expenses.
While critical illness insurance may be worth it for certain people with high-deductible health insurance, you may be better off putting the money toward a regular disability insurance policy instead since it covers a wider range of illnesses and injuries.
What is critical illness insurance and how does it work?
Like other types of insurance, you buy critical illness insurance well before you need it (and then hope you never have to use it). It pays out a benefit if you get any of the serious illnesses listed in the policy. To receive coverage, your illness typically has to be particularly serious or life threatening — like a heart attack, a stroke, coma, kidney failure, or malignant cancer.
If you have a covered illness, you’ll file a claim and receive a lump-sum benefit payment that you can use to cover whatever expenses you want, including but limited to:
Your health insurance deductible
Out-of-pocket medical costs
Transportation
Childcare
Rent or mortgage payments
Groceries
Daily living expenses
You won’t receive a benefit payment for illnesses that your policy doesn’t list, even if it's a serious condition. This is one major downside of critical illness insurance.
Policies can exclude coverage for certain types of cancer, non-life threatening illnesses, and other serious medical issues. Serious injuries, like a head injury after a car or bike accident, wouldn’t be covered either.
Other downsides of critical illness insurance
Besides the limited coverage, critical injury insurance has other cons that anyone considering a policy should know about:
Benefits may change for repeat diagnoses: Some policies exclude coverage if an illness recurs, others heavily reduce your benefit for a second diagnosis.
Benefits can change as you age: Coverage may become limited as you get older. You may also find that any coverage you buy later in life is very limited.
Is critical illness insurance worth it?
It depends. Despite its restrictive coverage, critical illness insurance might be worth it if you know you wouldn’t be able to cover your expenses in the event of a serious medical diagnosis.
You may want to consider a critical illness policy if you have high-deductible health insurance. These plans are cheap, but the deductibles can be thousands of dollars. You must pay off your deductible before anything is covered — a critical illness payment can help if you get seriously ill and can’t afford your deductible by yourself.
You probably don’t need to get critical illness insurance if you:
Have a health plan with a deductible you can easily pay off
Have long-term disability insurance that you didn’t buy from work
Receive regular care for a serious illness
Can afford to pay for any medical emergencies yourself
→ Read why it might be more worthwhile to get disability insurance
What does critical illness insurance cost?
Critical illness insurance is usually less than $50 a month if you’re young and in good health. Exact rates will depend on your age, health and medical history, and other factors.
Some critical illness plans will return part of your premium if you take steps to prevent a serious illness. Some insurance companies, for example, may offer a rebate if you undergo regular colonoscopies, mammograms, and other preventative health screenings.
Your policy may be even cheaper if your job pays for part of it. Many companies offer critical illness insurance as an employee benefit that you can opt-in to during the open enrollment period. You can also buy coverage yourself from a supplemental insurance company like Aflac.
Critical illness insurance vs. disability insurance
In general, disability insurance provides more coverage than critical illness insurance does. If you have to choose just one, we recommend getting disability insurance over critical illness insurance.
Disability insurance pays benefits when you’re hurt or sick and can’t work. This might seem similar to what critical illness insurance does, but there are a few key differences:
How coverage works: Disability insurance pays monthly benefits when you can’t work because of an illness or injury, not just specific serious illnesses.
What conditions are covered: You can receive benefits for most kinds of illnesses or injuries, there’s not a set list of eligible conditions.
How long you have to wait for benefits: Both types of policies have waiting periods — the set amount of time you have to wait to receive benefits after filing a claim. With disability insurance, this can be 30 days to two years depending on the type of policy, critical illness insurance policies typically have waiting periods of 30 days.
Your benefit amount: Your disability insurance benefits are based on how much you make. A good policy should fully replace your after-tax income.
How long you receive benefits: Long-term disability insurance pays regular benefits for as long as you’re disabled, even if that’s for the rest of your working life. You don’t receive a lump-sum payment unless you choose one.
Neither disability nor critical illness insurance cover pre-existing conditions — these are medical conditions that are already on your medical record when you buy coverage.
Critical illness rider for life insurance
If you have life insurance or you’re thinking about buying it, you may be able to add coverage for critical illnesses to your policy. Many life insurance companies offer critical illness riders (in this case, a rider is just a change you make to your policy).
This kind of rider works the same as a standalone critical illness policy. If you’re diagnosed with a covered illness, you’ll receive a lump sum benefit that’s equal to a percentage of your policy’s death benefit.
