A Complete Guide to Critical Illness Insurance

Contributions by 3 experts

Updated: May 22, 2024

Advertising & Editorial Disclosure

Healthcare expenditures in the country reached approximately $4.3 trillion in 2021, according to the U.S. Critical Illness Insurance Market Survey. This survey found that each person spent an average of $12,914 on healthcare during the year.

Having health insurance is one way to protect yourself from substantial medical expenses. But many don’t know that a standard policy may not cover all costs, especially those created by life-threatening diseases.

This is where critical illness insurance comes in. It’s a type of insurance that covers severe diseases and conditions. By understanding what critical illness insurance is, how it works, what it covers and the factors to consider, you can determine whether this type of coverage is right for you.

Critical Illness Insurance by the Numbers

 

Critical illness insurance provides additional protection when a life-threatening health condition occurs. Millions of policies are active in the United States, leading to billions in total benefits.

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More than 5 million critical illness policies are active. Of these, around 2 million are considered new policies.

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Critical illness policies in force are at a $1.5 billion total premium. $79.2 billion total amount of benefits is currently active.

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The average amount of benefits in force per critical illness policy is $29,104 for traditional individuals, $14,182 for group/worksite attained age and $18,989 for group/worksite issued age plans.

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The average age of critical illness plan buyers is 43. The average age of claimants is 56 for traditional individual plans and 51 for both group/worksite attained and issued age policies.

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The most common reasons for critical illness insurance claims are cancer, heart attack and stroke. Cancer holds the highest percentage across the board with 66% for traditional individuals, 52% for group/worksite attained age and 43% for group/worksite issued age plans.

Sources:

American Association for Critical Illness Insurance, Gen Re Research Center

What Is Critical Illness Insurance?

According to the National Center for Chronic Disease Prevention and Health Promotion, six in 10 adults have some type of life-threatening diseases, such as Alzheimer’s, cancer and stroke.

Critical illness insurance is a type of health insurance that can help manage substantial medical bills due to the diagnosis of life-threatening diseases. It can provide supplementary coverage to standard health insurance and create additional financial safety.

How Does Critical Illness Insurance Work?

Critical illness insurance, as the name suggests, applies to possible healthcare costs incurred after being diagnosed with a critical illness. It can help you pay for costs that a standard policy doesn’t cover and non-medical expenses such as transportation, rent, mortgage and childcare. After filing a claim, your insurance provider will release the benefit amount in a lump sum or monthly payments.

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HOW MUCH DOES IT COST AND HOW MUCH WILL YOU NEED?

The cost of a critical illness insurance plan varies per person. Insurers consider individualized factors. The coverage level you choose also affects your premium.

Similarly, how much coverage you’ll need depends on your situation. Generally, it’s best to consider your monthly living expenses and the years you may need the cash benefit.

How Critical Illness Premiums Are Calculated

The cost of insurance premiums also depends on the insurance provider. Each insurer has its rates and calculations. But generally, companies evaluate certain factors like age, occupation, hobbies and lifestyle, health, family medical history and coverage.

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    Age

    Since health problems typically increase with age, insurance providers typically charge older people more than younger individuals.

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    Occupation

    Some jobs are more dangerous than others. You can expect higher insurance premiums if your job puts you at risk of potentially serious illness.

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    Hobbies or lifestyle

    If you smoke, drink or participate in dangerous hobbies and risky extreme sports, you’re likely to pay more on insurance.

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    Health

    Individuals in good health usually pay less in insurance premiums because they have a lower risk of being hospitalized or diagnosed with a critical illness.

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    Family medical history

    Insurance providers also consider family health history. You may need to pay higher insurance premiums if your history includes life-threatening diseases.

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    Coverage

    How much coverage you purchase also affects the cost of your premium. The higher the coverage level, the higher the premiums.

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WAYS TO BUY CRITICAL ILLNESS INSURANCE

Generally, there are two ways to purchase a policy. You can get one through your employer. Check if they offer critical illness insurance as part of the employee benefits package. Another option is to buy an individual plan from a private insurance provider.

Before deciding where to buy a plan, make sure you compare your options. Consider the cost, coverage and other fees you may need to pay.

An illustration of a patient with chronic illness getting covered by critical illness insurance.

What Does a Critical Illness Insurance Policy Cover?

Critical illness insurance coverage may vary depending on the policy. It typically covers cancer, heart conditions and organ damage. Some insurers may offer more comprehensive policies that include other serious diagnoses.

There are also conditions that this type of insurance doesn’t cover, including pre-existing illnesses, particular injuries, asthma and diabetes.

What’s Covered
  • Cancer: Depending on the severity, the policyholder may receive the benefit amount in full or only a partial payment.
  • Heart conditions: Critical illness insurance companies typically cover heart conditions, such as coronary artery disease, stroke and heart attack.
  • Organ damage: Policyholders typically receive the full benefit payment for major organ-related conditions such as kidney failure. Organ transplants are also included.
  • Other diagnoses: Some policies are more extensive and include different types of conditions, including Alzheimer’s, paralysis, coma, loss of speech, loss of hearing, loss of sight, multiple sclerosis and traumatic head injuries.
What Isn’t Covered
  • Pre-existing conditions: Critical illness insurance doesn’t cover pre-existing medical conditions and any critical illness caused by such conditions.
  • Certain types of injuries: If the injuries are self-inflicted, results of an illegal act, due to substance abuse or sustained in war, the policyholder isn’t eligible to file a claim.
  • Certain chronic diseases: Insurance providers don’t cover all types of diseases. Among the most common exceptions are asthma and diabetes.
An illustration of a patient with a doctor discussing what critical illness insurance covers.

Is It Worth Getting Critical Illness Coverage?

Determining whether critical illness coverage is worth it depends on your specific needs and circumstances. Some individuals may find the additional expense unnecessary. Others may need it due to the health risks they’re facing.

Consider the factors that may affect your healthcare needs, such as your family medical history and lifestyle risks. Get personalized quotes and see if the insurance premiums fit your budget. Understanding the pros and cons of critical illness coverage can help you make an informed decision.

Benefits and Drawbacks of Critical Illness Insurance

Knowing its key benefits and potential drawbacks help you better understand how critical illness insurance works. It also allows you to find ways to maximize your health insurance plan.

Benefits
  • It can help you pay off medical expenses, especially if you need treatment or medical services related to critical illnesses not covered by standard policies.
  • You may receive the benefits in a lump sum. Depending on the agreement with the insurance provider, you may get the benefits in full upon diagnosis of a covered condition.
  • You may use the insurance proceeds for non-medical expenses, such as transportation, rent, mortgage, childcare and purchase of necessary equipment.
Potential Drawbacks
  • Premiums can be high. Although critical illness insurance premiums may be low, they can rise as you age. Getting a comprehensive policy also comes with additional costs.
  • Coverage varies. The types of illnesses covered may differ per insurer. Some serious diseases like diabetes and pre-existing conditions are typically not covered.
  • There may be age restrictions on benefit payouts. The coverage may also end or change once the policyholder reaches a certain age.

When Is a Critical Illness Plan Needed?

Evaluating your situation can help you figure out if you need critical illness insurance or not. You may want this coverage if you’re at risk of a specific critical illness. It can supplement your standard health insurance policy to ensure financial protection, which is especially important if you’re the family's breadwinner.

But if you have comprehensive health insurance that includes other coverages that may overlap with critical illness insurance, it may be better not to pay an additional premium.

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    There’s a risk of getting a certain critical illness

    Some people are more at risk of having certain health conditions, such as cancer and organ damage, because of family medical history, the nature of their job and lifestyle.

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    You’re the breadwinner

    Preparing for possible financial issues due to a serious medical condition is essential if you’re the family’s breadwinner. Critical illness insurance can help with daily living expenses and other non-medical costs.

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    You can’t afford healthcare costs

    You’ll need a critical illness plan if you don’t have enough emergency funds to cover possible healthcare costs. It also comes in handy if your plan has a high health insurance deductible or doesn’t cover critical illnesses.

An illustration of a health provider what needs to be considered when taking out a critical illness policy.

Factors to Consider Before Taking Out a Critical Illness Policy

Some people may find critical illness insurance as a financial safety net. Others may consider it as just an additional expense. Knowing the factors that you need to consider can help determine if taking out this type of coverage is a good option for you.

1
Make sure you need the plan

Your family medical history, health, lifestyle and occupation play an important role in determining whether a critical illness policy suits you. Review your standard health insurance plan and see if you have comprehensive coverage that includes a critical illness and disability rider.

2
Check your budget

Affordability is also an important consideration. Check your financial situation and see if you’re ready for unexpected medical issues. Your budget will also help determine if you can afford the cost of the coverage level you want.

3
Know the type of coverage you need

Insurance providers offer different critical illness coverage. Before taking out a plan, ensure you know what conditions are covered.

4
Understand the pros and cons

Ensure the policy’s benefits outweigh the potential drawbacks.

Expert Insight on Critical Illness Insurance

Critical illness insurance helps you prepare for the considerable expenses of serious illness. However, understanding how it works and when to get a policy can take time and effort. MoneyGeek asked a few industry leaders to provide insights you may find helpful as you make your decision.

  1. When is the right time to get a critical illness plan?
  2. What tips can you share to help people find the best critical illness insurance?
  3. What common mistakes should individuals avoid when purchasing critical illness insurance?
Aaron Broom
Aaron BroomFounder and Agency Owner of Family for Life Insurance
John Espenschied
John EspenschiedAgency Owner of Insurance Brokers Group
McGuire Mynatt
McGuire MynattFinancial Professional and Insurance Specialist at Colorado Financial Advisors

Resources for Critical Illness Insurance

The right health insurance depends on your needs and circumstances. For some people, a critical illness policy is a much-needed addition. But others may not find it helpful. Fortunately, available resources can help you navigate health insurance plans, including critical illness coverage.

  • Coalition Against Insurance Fraud: Get information about insurance fraud, including common scams like fake health plans.
  • Critical Illness Insurance Calculator: Check how much critical illness insurance coverage you may need with the help of this online calculator.
  • Health Insurance Marketplace Calculator: Get an estimate of how much your premium will be for a health insurance plan from the Marketplace. Check if you’re eligible for subsidies.
  • Informational Videos: Learn about critical illness insurance, how to find the best plan and how much coverage you may need with the help of these videos by the American Association for Critical Illness Insurance.
  • USA.gov: Find government assistance programs for people who need help with their medical bills. See if you’re qualified.

About Nathan Paulus

Nathan Paulus headshot

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

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