The statistics are clear: People are living longer. As they do, they're more likely to experience a heart attack, stroke, cancer, kidney failure, or other critical medical problems. Although more people today are surviving these debilitating diseases, many still face life-altering changes to their daily lives that come with a large price tag.

 The costs associated with these medical conditions are oftentimes more expensive than most consumers realize. For example, a cancer diagnosis averages $146,000 per patient, with 1.3 million Americans diagnosed per year.

Modern medicine knows how to keep people alive and functioning longer, so chances are good that you can continue to work once you're stabilized. However, can you afford the treatments to get you rehabilitated and back on your feet? Insurance companies see these circumstances as an opportunity and in response have developed "critical illness insurance."

So what is critical illness insurance?

Although policies vary from company to company, critical illness insurance is a complement to an existing life insurance policy that typically pays a lump- sum to someone who suffers a specified critical illness and survives. Critical illness insurance is similar to cancer insurance, but even broader, and is a relatively new form of supplemental medical insurance. The medical conditions that qualify under critical illness policies can arise from serious injury, disease, and specified major surgeries.

Critical illness insurance was first introduced in 1983 in South Africa, and some European companies began offering critical illness policies soon after. Canada introduced them in 1995, and the U.S. followed in the late 90’s. Critical illness insurance is highly popular abroad (mainly because of the practice of nationalized health plans) although the reasons for the popularity of these policies vary from country to country.

Robert Ley, RHU, Vice President of Accident & Health Sales for the Independent Distribution Platform of AIG American General, describes the product’s popularity abroad:

“Critical illness has enjoyed tremendous success in foreign lands since its introduction in South Africa in 1983. Internationally, we tout the success the product has experienced in Great Britain, Australia, and Japan. Our neighbors to the north, Canada, have had great success with the product. However, there are market factors (i.e. nationalized health plans) that would explain some of the differences overseas.” 

Ley, who has spent his entire professional career (30+ years) in the insurance industry, is a published author and has spoken at numerous industry meetings on the topic of critical illness insurance.

Who needs critical illness insurance?

Critical illness products are enjoying great success in the group market, either through traditional employer-paid benefits, or voluntary offerings via payroll deduction. There are fewer carriers offering the product through individual sales; therefore this market has been considerably slower.

Insurance sellers tout critical illness coverage as something that can fill the gap between disability insurance and life insurance. Life insurance pays out when you die. Disability insurance pays out over time when you suffer a disabling illness or injury that prevents you from returning to work, and it can replace only a percentage of your lost wages.

“The average life expectancy is now longer than 70 years. Most people are not aware of the fact that the average age for a critical illness is 43. How many people do you know who have suffered and survived a heart attack, stroke, terminal illness, cancer,organ transplant, paralysis and other critical illnesses?” says John Haydukovichof Western Sky Corporation, an insurance agency in Nevada.

 “Who will pay the mortgage? What kind of lifestyle will you have to adjust to? Wouldn't you rather get a $100,000 check than a get-well card? Critical illness insurance provides a lump sum payment of immediate funds when the insured experiences a critical illness covered under the policy contract,” Haydukovich adds.

With critical illness insurance, you don't have to be disabled to collect. You also don't have to be employed, as you do to collect disability insurance. The payment is typically made to you in a lump-sum and can be used however you please, such as to pay your bills (or your mortgage), pay for home care, or even take a vacation.

Most, but not all, critical illness insurance policies include a clause, which states you must still be affected by the illness or disease after a waiting period of 30 days. Only after the waiting period has ended will you receive the benefits. If you do not show signs of the illness, or you do not survive those 30 days, the benefits will not be paid.

You can use your lump-sum to pay for medical expenses not covered under your other insurance policies, to pay for home health care, or to make up lost income if your spouse takes time off work to care for you. Other possible uses: retrofitting your car or home for a wheelchair, starting an education fund for your children, covering travel expenses, or keeping your business afloat while you're out of commission.

You don't have to worry about disability and critical illness policies offsetting each other. Likewise, insurers will generally pay out on a critical illness policy regardless of your health insurance.

Voices of dissent

A major consumer advocacy group; however, is sounding warnings about critical illness policies.

"It's better if nobody buys this stuff," says Gail Shearer, director of health policy analysis for the Washington, D.C., office of Consumers Union, an independent, nonprofit testing and information organization.

 The group has also strongly come out against cancer insurance. "Our view is people are better off with a comprehensive health insurance policy that meets their needs regardless of what makes them sick."

Shearer likens buying critical illness insurance to playing the lottery. "When people do their budgets, they should put this spending under 'gambling,'" she says.

Other critics argue that certain insurance carriers use “scare tactics” to frighten consumers into purchasing alternative policies such as critical care insurance.

Robert Hunter, a former Texas state insurance commissioner and now director of insurance for the Consumer Federation of America, commented, “The purchasers tend to be people with less financial service sophistication and less coverage availability who are being told that one out of three families are affected by cancer. The carriers use statistics to scare people...I have seen heavy-handed approaches where the carriers use fear to sell the product, saying ‘Wouldn't you feel bad if you got sick and your family was stuck with big bills?’”

Robert Munao, chairman of the Council for Employee Benefits Executives and president of Kaye Consulting Group, recalls observing critical illness presentations where fear played a large role in the sales process.

"Carriers scare people with the fact of extra bills if they don't have extra insurance," Munao declares. "But many employees do have disability insurance, and if they don't get cancer, they get nothing back on this policy. If you're a blue-collar worker making $25,000 or $30,000 a year and you're trying to put food on the table, it may not be smart to buy cancer insurance."

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