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Critical Illness Insurance: Filling the Benefits Gap

Two important trends are converging and affecting employers’ health benefit programs. As medical technologies and treatments improve, more people are surviving once-fatal forms of cancer, heart disease and other conditions. Many employers have responded to rising costs by increasing their employees’ share of costs. This can leave many employees with staggering healthcare expenses—even if they have medical benefits. The answer? Supplemental health benefits. 

The Advantages of Critical Illness Coverage 

A critical illness policy pays a lump sum benefit if a plan participant is diagnosed with a serious health condition, such as cancer, heart attack or stroke. Illnesses covered under the policies vary, but can include Alzheimer’s, paralysis, coma, multiple sclerosis and loss of hearing. These policies pay a lump sum upon diagnosis, which the insured can use for any expense—co-payments, travel costs, experimental treatments or even to replace wages of a family member leaving work to provide support. 

Maximum benefits under critical illness policies typically average around $25,000, with premiums costing about $300 to $500 annually, depending on the health, gender, age and location of the insured. Higher-end policies covering a dozen or more conditions generally pay benefits of more than $100,000 and cost about $1,500 to $2,000 a year. 

Most critical illness policies are written on a voluntary basis, or entirely employee-paid, although an employer may choose to offset part of the cost. Most policies qualify under Section 125 plans, so workers using payroll deductions can allocate pre-tax dollars to pay premiums. 

Critical illness policies are generally portable. In addition, equal benefit amounts are available for each family member when the employee buys family coverage. Some insurers offer a “return of premium” feature. If the insured dies of something that’s not covered by the policy—say, a car accident or a very rare disease—the provider will give back all of the premiums, minus any benefits already paid. 

Critical Illness Insurance vs. Cancer Insurance

Critical illness insurance differs from “cancer insurance” and other so-called “dread disease” coverages, which have been available for some time. First, critical illness policies cover illnesses in addition to cancer. What’s more, cancer policies are typically indemnity plans that pay for specific treatment costs, such as hospital stays or radiation treatments. For an additional premium, riders may be added to cover emergency room visits, certain inpatient and outpatient procedures and other disability benefits. 

While cancer treatment accounts for about 10 percent of U.S. health expenses, no single disease accounts for more than a small proportion of the overall national health care bill. That’s why it is essential to offer coverage for many serious illnesses, not just cancer. And because cancer patients often face large non-medical expenses, such as home care, transportation and rehabilitation costs, many prefer the flexibility of critical illness coverage.  

Eligibility and enrollment. Employees usually must complete a detailed medical questionnaire as part of the critical illness insurance enrollment process. Applicants might be denied coverage if they already have a covered illness or if several direct relatives have had one. Policies under $100,000 generally don’t require a medical exam. Some plans require waiting periods of 30 days or even several months before coverage begins. Some have a “survival period,” a period of time after initial diagnosis that the insured must survive before the policy will pay. 

Limitations. Most policies have age limitations. Many insurers won’t issue new policies after ages 59 or 65, although the age cutoffs vary by insurer. After the cutoff age, many policies reduce the lump-sum payout by half, but don’t reduce the premiums. In other words, if a policyholder has a stroke at age 75, she might only get half the benefit. Many critical illness policies also have fixed dollar limits, paying a maximum amount for individual services or limiting total benefits for a single illness to a fixed amount, such as $5,000 or $10,000.

Some financial advisors and consumer advocates claim that aggressive marketing by insurers might be scaring some individuals into purchasing coverage unnecessarily. They believe consumers would be better off devoting the premium dollars to savings, investments, or even to fitness programs to help reduce the risk of illness. In many cases, comprehensive health and disability coverage might be enough protection. However, since most employees do not have an adequate emergency fund, critical illness can provide valuable protection when the need arises. 

It’s a good idea to educate employees about their options regarding traditional health and disability insurance to ensure they make an informed decision about the need for supplemental benefits. Coordinating proposed benefits before adding critical care insurance can help avoid duplication of coverage. 

Critical illness insurance might hold special appeal for employees who are caring for children or aging parents. By lessening the financial blow of a serious illness, the employee can focus on recovery, rather than the added stress of staggering medical expenses. Supplemental benefits can boost employee morale and foster loyalty—both of which enhance productivity. For more information about the right critical illness or other supplemental benefit policies for your employees, please contact us.  

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