Critical Illness Insurance Benefits & Alternatives

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Critical illness insurance pays out a tax-free cash sum while you’re living if you meet certain health criteria. Not quite health insurance and not quite traditional life insurance, it can help individuals cover health expenses due to critical illnesses or enjoy a better quality of life while living with certain illnesses or medical conditions. But do you really need it? 

In this article, learn what critical illness insurance covers, types of critical illness insurance, and who should consider buying critical illness plans. 

Critical illness insurance worth

How Critical Illness Insurance Cover Works

A relatively new insurance product, critical illness insurance plans were created in the 1990s as average life expectancy reached historical highs. Individuals are living longer, but often longer life spans also mean living with health conditions and serious illness that require medical care not covered by health insurance. 

Critical illnesses like cancer or medical events with lasting repercussions like a stroke or heart attack are covered, as are individuals who undergo serious medical procedures such as a coronary bypass or organ transplant. Coverage varies by provider, but generally all of the following qualify for a critical illness payout:

  • Cancer
  • Stroke
  • Heart attack
  • Coronary bypass
  • Angioplasty
  • Kidney failure
  • Organ transplant
  • Paralysis
  • Coma
  • Alzheimer’s

If you qualify due to a covered illness, your insurance company will give you a lump sum payment. How you use the money is up to you. Most individuals opt to use cash benefits from critical illness insurance to cover out-of-pocket medical expenses, including:

  • Health insurance deductibles and copays
  • Medical treatments not covered by health insurance
  • Holistic health care or alternative medicine
  • Hospice or in-home nursing care
  • Nursing home expenses
  • Transportation costs associated with going to and from doctors appointments 
  • Child care costs associated with doctors appointments
  • Cost-of-living expenses if you’re unable to work
  • Home or vehicle modifications, like wheelchair lifts, ramps, etc.

You can also use critical illness insurance benefits to settle outstanding debts and for financial support, particularly in the case of a terminal illness where the insured doesn’t want to place a financial burden on loved ones. Some families opt to use their critical illness plan benefit for family vacations or other memorable experiences to celebrate and enjoy the time they have left.

out of pocket costs for critical illness policies

Stand-alone Critical Illness Insurance Coverage

Compared to other types of life insurance, critical illness insurance policies are relatively inexpensive. But part of the reason they’re affordable is because insurance companies know the odds of having to pay out a claim are relatively low. Because so few medical conditions qualify for a critical illness payout (and those that do tend to have strict stipulations), only about 60% of policyholders actually receive a payout.  

Policy costs vary and, like other types of life insurance, are based on health, age, sex, and lifestyle factors. The larger the face value of your policy, the more expensive it will be. Most insurers offer policies as small as $5,000 and possibly up to $500,000 in coverage. You may also have the option of choosing which illnesses or medical conditions you wish to cover, in which case, the more coverage options you choose, the more expensive your policy. 

In addition to making sure your stand-alone critical illness policy provides coverage for the right illnesses and medical conditions, it’s imperative to check for age limits within your policy. Some insurers terminate coverage after a certain age, or subject any payout to a pay scale or age-reduction benefit that may decrease the amount of money you receive, often by up to 50%. 

If your insurer terminates or scales back coverage at a certain age, it may be worth considering purchasing a return of premium rider. A return of premium rider is a type of additional insurance coverage that essentially insures your policy premiums. Once you reach a certain age, if you haven’t used your critical illness insurance, your catastrophic health insurance or company will return a portion of your premiums to you, so your policy wasn’t a total loss.

Stand-alone critical illness insurance doesn’t usually require a medical exam as part of the underwriting process, unless you are looking for a particularly high amount of coverage. You will likely have to answer a health questionnaire that may include questions about family help history to help your insurance company determine the risk factors associated with insuring you. 

Critical illness insurance helps cover major illnesses

Critical Illness Insurance Plan: Group Policies

With the rising costs of health insurance, it’s becoming more and more popular for employers to offer critical illness and supplemental insurance, as a voluntary benefit to employees. Generally, the critical illness insurance cost through an employer will be less expensive than a stand-alone policy. However, you may not have many options as to the coverage you receive. For example, group policies don’t usually allow employees to select which illnesses or medical conditions they want coverage for, and coverage amounts may be limited.

If you’re considering group critical illness insurance through an employer, be sure to look into whether or not your coverage is portable. In other words, if your employment is terminated, if you change jobs, or if you retire can you take your major illness coverage with you?

Group policies don’t require medical exams or a long waiting period and usually are guaranteed-acceptance, meaning you automatically qualify — even without a health questionnaire or consideration of family medical history.

Covered Illnesses for a health plan

Critical Illness Rider

If you already have life insurance or are considering a life insurance policy, you don’t need to have a separate stand-alone or group critical illness policy. Instead, you can add coverage to your life insurance in the form of a critical illness rider to ensure your financial protection in the case of unexpected medical treatment from heart attacks to other unexpected illness. Riders typically cost less than separate insurance policies and can offer a greater array of critical illness benefits because they are lumped in with the benefits of your life insurance policy. This is especially true if you purchase a critical illness rider with a permanent life insurance policy like whole life insurance.

Whole life insurance guarantees coverage for life, provided premiums are paid. Therefore, if your critical illness coverage ends at a certain age or is subject to an age-reduction benefit, you can still rely on funds from the cash value of your whole life policy to cover out-of-pocket medical costs.

What’s more, whole life insurance also earns a guaranteed rate of return and pays out a guaranteed, tax-free death benefit. If you opt to purchase whole life insurance through a mutually owned life insurance company, you’re also eligible for non-guaranteed dividends, which can be used to purchase additional insurance or pay policy premiums. This means you can grow and protect your wealth during your lifetime and leave a legacy for your loved ones.

Permanent life insurance is significantly more expensive than a stand-alone or group policy. But if your financial goals surpass what a simple critical illness insurance policy can offer, opting for a permanent life policy with a critical illness rider provides a more comprehensive and personalized approach to financial security. Some reasons people choose permanent policies, including those previously mentioned, are:

  • A guaranteed, tax-free death benefit
  • A guaranteed rate of return (guarantees dependant upon policy type)
  • Investment opportunities (depended upon policy type)
  • Cash value you can access at any time
  • Cash flow in retirement
  • Tax-free policy loans
  • Estate tax benefits
  • Gift tax benefits
  • Creating generational wealth
Critical illness insurance exchanges a monthly premium to provide coverage

Critical Illness Insurance Alternatives

There are a handful of insurance products designed to cover out-of-pocket medical costs, cost-of-living expenses, and provide additional funds in the event of a medical issue. Because critical illness insurance is limited in its scope of coverage, people often purchase alternative types of insurance like disability or long-term care, or add riders like guaranteed insurability, to hedge against the unpredictable. 

Disability Insurance As Additional Coverage

Disability insurance covers you in the event you’re unable to work and qualify as disabled. According to the Council for Disability Awareness, 30% of people will become disabled at some point in their career before retirement. 

If you don’t have a family history of heart disease, cancer or Alzheimer’s but you do work in a highly physical field, it might be worth considering disability insurance, which provides a payout that can be used for expenses—medical or as replacement income. 

Disability insurance can be purchased as a stand-alone policy and it is often offered as a benefit to employees through your employer. When purchased as a rider with a permanent life insurance policy, it’s also possible to customize coverage so that your insurance policy premiums are paid if you become disabled, called a waiver of premium rider.

Long-Term Care Insurance for In Home Care

Long-term care insurance covers you in the event you need to be placed in a nursing home or require day-to-day assistance for basic tasks, and can also cover hospice care or any other out-of-pocket expense.

Traditional stand-alone long term care policies tend to be “use it or lose it” scenarios. If you buy the product but don’t need it, you won’t see a benefit. However, long-term care riders with permanent life insurance or or individual asset-based long-term care products function more like traditional life insurance policies, in that they can be structured to provide a tax-free death benefit to loved ones in the event you don’t need long-term care. Should your health deteriorate, you can tap into the death benefit while you’re still living and any remainder will be paid out to your beneficiary after you pass away. 

Guaranteed Insurability Rider

A guaranteed insurability rider isn’t a stand-alone product; it must be purchased in conjunction with a life insurance policy. It’s worth considering if you’re currently in good health but are concerned your health may deteriorate in the future. If you have a family history of illness of any kind, a guaranteed insurability rider can help give you peace of mind. It allows you to increase your insurance coverage at various times without additional medical exams or underwriting. In other words, you’re guaranteed to qualify. 

The total benefits of critical illness insurance

What About a Health Savings Account (HSA)?

Health savings accounts, or HSAs, are offered with certain high-deductible health insurance plans and allow you to contribute pre-tax dollars to an account reserved for out-of-pocket medical expenses. Once you have at least $2,000 in your HSA, additional contributions can be invested in various market-based accounts, which may help further grow your healthcare piggy bank. On the flip side, investments carry inherent risk and are not guaranteed. 

Many individuals enjoy contributing to an HSA and rely on it for medical bills not covered by their insurance, for deductibles, and for copays. But there are two key issues with only relying on an HSA for unexpected costs:

  1. Annual Contribution Limits
  2. Spending Restrictions

Insurance provides a full lump-sum payout under qualifying circumstances regardless of how much you’ve paid in premiums. If you get sick in the early years of your policy or twenty years down the road, the payout is the same. 

HSAs are only worth as much money as you’ve contributed (minus any taxable investment gains), so if you haven’t been contributing for several years, your account will be quite small. Factoring in annual contribution limits, which are $7200 for families and $3600 for individuals in 2021, it can take a long time to have sufficient funds to cover a large medical bill.

With insurance payouts, you can use funds however you see fit. Medical bills, cost-of-living expenses, travel… there are no limits to how you use your benefit. However, an HSA can only be used for qualified medical expenses not covered by your health insurance plan. It won’t help you pay the bills if you can’t work.

critical illness insurance cover for critical illnesses

Choosing the Right Health Insurance Coverage

Regardless of your current health insurance, unforeseen medical issues come with hefty bills that, uncovered, can severely derail your financial goals. In fact, sky-high medical bills account for the majority of bankruptcies filed by families in the U.S. 

It’s worth considering critical illness insurance if you:

  • Have family history of medical conditions covered by critical illness insurance, like heart disease, cancer, or Alzheimer’s disease
  • Have high insurance deductible and/or little savings in the event of a medical emergency covered by critical illness insurance
  • Would experience a significant financial burden if you were unable to work due to a condition covered by critical illness insurance

If none of the aforementioned apply to you, you may be better off considering disability insurance, asset-based long-term care, term life insurance or a permanent insurance policy. 

At Paradigm Life we can customize a policy to fit your financial situation. Our expert Wealth Strategists are available to answer your questions and show you customized illustrations, outlining an individual plan of action to help you achieve your goals. Request a free virtual consultation, no strings attached.


What’s the Right Healthcare Policy for you?

Overall, critical illness insurance emerges as a vital component in a comprehensive financial plan, especially in the face of rising healthcare costs and the prevalence of chronic illnesses. This insurance type offers a tax-free lump sum to policyholders upon diagnosis of a covered critical illness, providing much-needed financial support during challenging times. It covers a range of conditions like cancer, stroke, heart attack, and more, allowing the funds to be used for various purposes, from medical expenses to daily living costs.

We can walk you through the pros and cons of each type of insurance and suggest additional types of riders not discussed in this article that might better suit you and your family. We help clients in all 50 states and Canada customize life insurance policies to optimally grow and protect wealth so you can secure the financial future of your dreams.

At Paradigm Life, we know that millions of people follow out-of-date financial advice that prohibits the future they deserve. Perpetual Wealth 101 consists of a series of free videos that teach you The Perpetual Wealth Strategy™ and guide you to a secure financial future.

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Q: What is critical illness insurance, and what are its primary benefits?

A: Critical illness insurance is a policy that provides a lump-sum payment upon the diagnosis of a covered serious illness. Its primary benefits include financial support for medical expenses, debt repayment, and peace of mind during recovery.

Q: What types of illnesses are typically covered by critical illness insurance?

A: Critical illness insurance typically covers major illnesses such as cancer, heart attack, stroke, and organ transplant. The specific illnesses covered can vary by policy, so it’s important to review the terms and conditions.

Q: Are there alternative strategies for managing the financial impact of critical illnesses?

A: Yes, alternatives include comprehensive health insurance, emergency savings, and disability insurance. These options can provide financial protection in case of illness, but critical illness insurance offers a specific, targeted benefit.

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